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The active vs passive debate might be on but there's hardly any doubt that passive investing is here to stay. The rising adoption of passive investing, more and more mutual fund launches in the category and expectations that fund managers will not be able to generate alpha in the future due to rising market efficiency are some of the reasons that predict a bright future for passive funds in India.
The rise in adoption is being driven by three factors — failure of majority of largecap funds to beat the indices, low costs and easy access to international and sectoral investing. Let us look at each factor one by one:
Underperformance of largecap funds
In recent times, several reports have pointed towards diminishing alpha in actively-managed largecap funds. A rough analysis of one-year return of active largecap funds shows that around 70% of them failed to beat the indices.
Given this scenario, most fund houses have launched passive funds in the largecap space in the past year or so.
Low costs
The fund management cost in the case of passive funds can be as low as one tenth of the charges sought by active funds. In fact, some mutual funds are now offering passive funds with expense ratio of less than 0.1%.
Easy access to international and sectoral investing
Many MFDs and RIAs ask their clients to invest a small but significant portion of the portfolio in sectoral and international funds to enhance returns and safety of the corpus through diversification.
Passive funds present a strong case in both these segments given the low-cost structure and high transparency. On top of that, they are free of fund manager risk, which is one of the major reasons behind underperforming active funds.
Passives are the new frontier
The above factors show passives are here to stay and if we are to believe recent reports, their AUM is set to reach Rs. 25 lakh crore by 2025. Given the high chances of passives becoming dominant in the mutual fund industry, Cafemutual is hosting a conference on passive funds, where top minds in the industry will explore every aspect associated with passive funds and the opportunities they present for distributors.
You can learn more about the first such event in the industry by clicking here.
