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At the recent Cafemutual Passives Conference 2025, Whole Time SEBI Member Amarjeet Singh spoke on the evolution of the passives industry, and how passive funds must remain simple, transparent and low cost.
In a session titled “Regulatory perspective on Passives”, the SEBI WTM said “The industry should ensure that the quest for AUM or incentives does not override the principle of suitability” and that “Our job as regulators, asset managers, advisors and distributors is not just to grow AUM, it is to build an ecosystem that is inclusive, resilient, robust and ethical.”
Singh spoke on three aspects of passives - the future, how the narrative should be active and passive rather than active vs passive, and what key measures SEBI is taking to support the development of passives.
Singh expanded on the history of passive investing, beginning with the skepticism faced by Vanguard founder John Bogle when he launched the first retail index fund. But 58% of US equity fund assets are now in passive strategies. He drew a parallel with the passive industry in India, which now makes up 17% of the total mutual fund industry AUM today. He highlighted that ETFs and Index funds have grown at a CAGR of over 28% over the last few years. The AUM of individuals’ investors have in fact doubled over the past five years, reaching 26% of the total AUM in passive funds.
Let’s look at some of the key points covered in the session:
- He warned that passive product designs are becoming complex. While innovation is good, AMCs must stay responsible and not push products just to increase AUM. Core promise of passives is simplicity, transparency and low cost.
- SEBI WTM believes that one of the major advantages of passive funds is low cost. Just like USA, the cost of passive funds in India will go down further due to increasing competition.
- Singh also pointed out that another factor in the growing passive investing movement is the underperformance of active funds. In the US, 85% of large cap funds underperformed the S&P 500 over a three-year period, and 90% of large cap funds underperformed over a 15-year period.
- In India over a three-year period, 43% of total schemes in direct plans underperformed the benchmark, while 67% of regular plan total schemes underperformed. Also, 29% of direct plan AUM and 49% of regular plan AUM underperformed. Regular plans have a higher component of charges and fees, so underperformance becomes even sharper.
- Singh said that concerns exist with the rise of passive investing. One is that index construction must be transparent and free from conflict of interest.
- There are also concerns that passive investing may ignore company fundamentals and lead to wrong pricing in the market. It can also cause over investment in top stocks. In the US, the top 10 companies make up nearly a third of the S&P 500 index.
- He said passive investing could make all stocks in an index move together, reducing the benefit of diversification. However, this may open new chances for active managers to find underpriced stocks.
- Active managers can also take quicker actions in uncertain markets. Passive funds cannot. So, both active and passive styles can exist and help different investors.
- As a regulator, SEBI supports balanced growth of both active and passive funds. SEBI introduced the MF Lite framework for passive only mutual funds in which, it relaxed rules on eligibility, trustee roles, governance and reporting. Existing mutual funds can shift their passives business to a separate group company under MF Lite regulations.
- SEBI introduced targeted approach towards tracking error and tracking difference for fund houses
- SEBI also talked about the need for better governance in mutual funds, especially as more small investors enter. SEBI and AMFI have asked AMCs to set up strong systems to stop fraud and front-running.
- All AMCs must now follow the same standards for internal checks, whistleblower systems, and market surveillance.
- Mutual funds can also improve corporate governance through voting and engagement. SEBI has been pushing funds to do their stewardship duties well.
- SEBI has asked AMCs and AMFI to do more awareness activities for passive funds to improve investor education.
