Close to 10% of the total assets in the MF industry has come from index funds and ETFs. Over the last few years, the assets of passive funds in India has grown significantly to Rs.3.10 lakh crore. The rise in assets indicate growing popularity of passive funds among investors.
However, many people are yet to explore passive funds as they hold some myths around passive investing. In this article, we demystify these myths related to passive investing.
Myth 1: There are limited passive investment avenues available
Myth Busted: The mutual fund industry offers several passive schemes. AMFI data shows there were more than 100 ETFs as on March 21 comprising 11 gold ETFs and 92 other ETFs including debt ETFs. Further, the passive avenue also has 44 index schemes. In addition, there were FOFs to choose from.
These schemes give exposure to all asset classes – equity, debt, commodity and international.
Myth 2: Passive investing just mirrors index returns
Myth Busted: Passive funds try to replicate the index closely. However, factors like inflows, outflows, expense ratio, etc. result in a difference between the index return and the fund return. This difference is known as tracking error.
Further, there are smart beta ETFs that try to outperform their respective benchmark. Typically, smart beta ETFs follow quant-based models that are designed to assign weights to securities in an index based on objective parameters. They apply a series of objective and rules-based screens to the index and companies are then ranked and weighted based on these specific factors.
Myth 3: Passive investing is generally less rewarding
Myth Busted: Actively managed funds are increasingly finding it difficult to beat the indices, shows S&P Indices Versus Active Funds (SPIVA) India Scorecard. In fact, last year rally was a classic example. While most passive funds and ETFs delivered at par returns with their respective benchmarks, many actively managed funds underperformed benchmark due to the narrow rally in the market.
Myth 4: Passive investing restricts portfolio diversification
Myth Busted: As passive funds track an index, they give broader access to the markets. Further, there are some passive funds that follow international indices and funds that give geographical diversity to the portfolio. In addition, sectoral ETFs can give sectoral exposure at lower costs.
Myth 5: Passive investing is suitable only for novice investors
Myth Busted: Passive investing is ideal for those wanting to keep investing simple without having to actively track the portfolio. It is also suitable for cost-conscious investors and investors reluctant to take risks linked with fund manager selection.
