Mutual fund distributors are now more open to recommending passive funds to investors as scope for benchmark beating returns has diminished in some active fund categories. However, majority of them are still not in favour of endorsing passive funds to their clients.
In a recently held 'Mood of the MFDs' survey by Cafemutual, 45% of MFDs said they are likely to recommend passive funds to clients. Rest 55% said they do not recommend passive funds. The survey that was held last month saw participation from 361 MFDs across the country.
MFDs and RIAs contacted by Cafemutual said they have warmed up to the idea of passive funds and are recommending index funds and ETFs in some categories.
"I have started recommending passive funds as it's the only way a client can invest in an index. The other reason is that investors want to invest in low-cost products. So, when I come across a new theme in the passive space, I recommend it to them," said Agra MFD Dipesh Sethia.
"We have definitely been suggesting a lot more passive funds especially on the large cap side. Data that has come out from independent sources seem to indicate that the ability of actively managed large-cap funds to beat the benchmark has diminished. Earlier the belief was that passive investing is only a developed market phenomenon and that fund managers in countries like India have scope to deliver alpha even in the large cap space. This belief no longer holds true in India now," said Vishal Dhawan of Plan Ahead Wealth Advisors.
Lovaii Navlakhi, MD & CEO of International Money Matters, also expressed a similar view.
"We are recommending passive products in certain categories in the past 3 years or so. After the recategorisation, there's no point to invest too much in largecap active funds. Also, some of our international investing happens in passive funds because we think that index funds are a better option than active funds in this space. Now, we are also recommending passive funds in gilt and a few other debt categories," Navlakhi said.
But not all MFDs are convinced with the theory that passive funds can deliver better returns than active ones.
"India is still a developing economy. There's a lot of scope for fund managers to deliver index beating returns. Active funds have been outperforming the index year after year in India and will continue to do so in the years to come. That's why I never recommend passive funds to any client," said Mumbai-based MFD Sadashiv Phene.
Passive funds, which were steadily gaining popularity in India, got a major boost last year and the momentum has continued in 2021. The AUM of index funds and ETFs have more than doubled during the January 2020 - May 2021 period. The AUM of index funds and ETFs (including gold ETFs) which was around Rs 8,082 crore and Rs 1.85 lakh crore in January 2020 rose to Rs 22,904 crore and Rs 3.16 lakh crore respectively at the end of May 2021.
