Passive funds have carried their FY 2021 momentum to the present financial year. Assets under management (AUM) of non-gold ETFs and index funds have surged 16% in the first four months of FY 2022 to Rs.3.5 lakh crore. In the last financial year, passive AUM almost doubled to Rs.2.9 lakh crore from Rs.1.54 lakh crore at the beginning of FY21.
This reflects that passive investing is finally taking roots in India. More and more retail investors are joining the passive bandwagon due to their low cost structure and the inability of most large-cap active funds to generate alpha.
According to Hemen Bhatia, Deputy-Head ETF at Nippon India MF there are few other reasons behind the surge in investor interest. "ETFs and index funds make asset allocation easier for investors as they provide a broad exposure. Fintechs have also played a role in driving greater investments in passive funds," he said.
Investor awareness and transparency are also among the reasons. "Investors now have access to platforms where they can easily compare the costs and returns of various funds. As active large-cap funds haven't been able to deliver, investors see no rationale to pay a higher fee," Bhatia said.
Beyond retail investors, institutional investments and flow of PF money into ETFs are the top drivers of passive AUM.
'Trend to continue'
The rise of passive funds, which started in 2018 after SEBI reclassified mutual fund schemes, is expected to accelerate further in years to come. "It will pick pace as time goes. The acceleration will shift from second to fourth gear. That is what has happened in the developed markets and is likely to happen in India too," Bhatia said.
The reclassification of schemes was a boost for passive funds as it took away the leeway from active large-cap fund managers to invest high amounts in mid and small cap stocks. Prior to it, fund managers had better scope to deliver alpha by investing significant amounts in mid and small cap stocks.