AMFI data indicates that passive funds have been gaining popularity in India. The AUM of the index funds, which stood at Rs. 7,944 crore in Jan 2020 grew almost twice to Rs. 15,359 crore in Jan 2021. Likewise, the AUM of ETFs (excluding gold ETF) saw a rise from Rs. 1.75 trillion to Rs. 2.57 trillion over the last one year.
This indicates that passive funds have been getting popular among investors. MFDs should consider being in this space to grow business. Here are a few reasons passive funds make business sense for you.
A proposition in the large-cap space
Following SEBI’s mandate, fund houses started benchmarking scheme performance against Total Return Indices (TRI). TRI accounts for dividend income and reflects the actual performance of the fund. This led to underperformance of large cap funds with many such funds finding it challenging to outperform the TRI benchmarks. In such a scenario, MFDs should look at recommending passive funds for large cap exposure.
A route to international investing
Portfolio diversification is no longer limited to national boundaries. A geographically diversified portfolio gives access to global opportunities. Further, it helps in managing the portfolio risks by reducing the dependency on economy. Some index funds track international indices like the S&P 50, a broad market index comprising top 500 US companies. Domestic investors can have exposure to renowned international brands through these funds.
Better business prospects
Passive funds give broader access to the markets. The recent past has shown that market rallies could be driven by the performance of just a handful of stocks leading to the underperformance of many actively managed funds.
Further, they track a particular index and have a limited involvement of the fund managers. The running cost of these funds is also lower. Lower costs generally lead to better returns, which in turn can generate higher commissions for the MFDs.
