‘MFDs will have to move towards passives to sustain and grow their business’

Indian mutual fund market has started its shift towards passives like many global markets. However, there are still challenges faced by AMCs and the distributor community at the present stage of this journey.

Four prominent AMC CEOs - B Gopkumar, MD & CEO, Axis MF, DP Singh, Deputy MD & Joint CEO, SBI MF, Swarup Mohanty, Vice Chairman & CEO, Mirae Asset MF and Vishal Kapoor, CEO, Bandhan MF discussed some of these challenges and shared their views at the recent Cafemutual Passives Conference. Prem Khatri, Founder & CEO, Cafemutual moderated this session. Here is a summary of their discussion:

Are AMCs worried about passives affecting their profits?

B Gopkumar pointed out that the profit margins are even lower for AMCs in fixed income products compared to passives. He believes that passives will play an important role in the future of the industry and as manufacturers, it is necessary for AMCs to prioritize launching products that are beneficial to the customers and not just look at margins. He believes that increase in scale of passives will also lead to increase in profit margins in the future.

DP Singh is of the view that passives is a high-volume low margin game where profits are the by-products. Instead, he thinks that the MF industry should focus on bringing more investors in the MF fold through passives than focusing on margins.

Is growth in passives coming at the cost of actives?

Swarup Mohanty said that in passives, the market cap based products have very low margin. However, if an AMC comes up with a unique product, it can charge a higher margin.

Vishal Kapoor thinks that passives have accelerated the inclusion of more investors in the MF fold. He pointed out that many investors of the younger generation are now using passives as their entry into mutual funds. He adds that low margins are a result of natural evolution of the MF industry with increase in competition among AMCs. He believes that if the customers continue to move towards passives, then AMCs will have to redesign their business model to adjust to the new market while maintaining good profit margins.

How do AMCs maintain innovation in this competitive market?

Gopkumar said that the success of passive products depends on performance-based factors like tracking error and tracking difference. He also admits that the industry has failed to make passives more popular among distributors and should look to do so to reach more investors.

How can AMCs maintain an edge in passives business?

DP believes that there is no need for AMCs to compete against each other. He thinks that even if different fund houses have similar products, they will have sufficient investors to sell their products.

Swarup says that ideation of new products is essential for the passives industry. He also adds that the AMCs should start focusing on the actual cost bore by the investor besides the TER of schemes.

Vishal believes that there are enough opportunities when it comes to investor needs and manufacturers’ capabilities — and matching the two should be the first priority when launching a product. He added that AMCs should then focus on efficiency and scale.

How can investors choose from the wide range of passives?

Gopkumar believes that there is a lack of smart beta and thematic ETFs in the market. He also thinks that investor awareness about these funds is still low, which has led to reduced retail participation.

DP explains to investors and MFDs that they  should not be overwhelmed by the number of indices and schemes, as the majority of assets are still in schemes benchmarked to top indices. He also believes that, due to their popularity, more smart beta products will be available in the future.

On distributors finding it difficult to understand so many products

Vishal says he does not agree that distributors find passives more difficult to understand. He believes that the problem of choice will continue to grow more complex in the future, and as the economy and investors evolve, more themes will emerge. He adds that new passive products will need to align with these evolving needs and investment themes of modern investors. He believes that the thematic and factor-based segments in passives will continue to grow.

How should MFDs adopt passives and realign their value proposition?

Gopkumar advises MFDs to decide whether passives should be part of the core or satellite portfolio based on an investor's risk profile. He also emphasizes that passives should not be added to portfolios merely as a checkbox separate from actives. He encourages MFDs to explore debt passive schemes, which he believes are superior to fixed-return products like FDs.

While acknowledging that there is still ample space for active funds today and that actives are likely to generate alpha over the next 5–10 years, D.P. Singh suggests that MFDs should maintain a balanced mix of active and passive funds, just as AMCs do.

Vishal Kapoor believes that MFDs must decide whether they want to sell fast-growing products with low margins or high-margin products with lower growth. He warns that MFDs must move towards passives to sustain and grow their businesses. For those early in their distribution journey who prefer to sell active funds due to higher margins, he suggests selling index funds, which offer relatively better margins among passive products and enjoy strong popularity.

Why should MFDs sell ETFs despite low margins?

Swarup asserts that margins should not be the only consideration for MFDs. He says that the key to success in the mutual fund business lies in increasing conviction and reducing bias. He points out an 80% bias toward active equity among smaller MFDs and notes that the key to higher AUM is aligning client portfolios with investor needs through a better balance between actives and passives. He believes that MFDs who align their advice with client needs can increase wallet share.

How is your AMC supporting MFDs to sell passives?

Gopkumar says that his fund house, Axis MF, includes passives in their interactions with MFDs to support distribution. He also shares the AMC’s plan to launch more simple, easy-to-understand passive products in the future.

DP says that SBI MF is working to educate distributors about the pros and cons of passives and is also providing digital platforms to help more people enter the distribution business.

Swarup highlights Mirae Asset MF’s efforts to support MFDs in transitioning from non-demat to demat models, including back-end support. He adds that the AMC continues to educate MFDs and provide them with more solutions.

Vishal shares that his fund house is developing interactive learning programs to help MFDs understand the more complex concepts of passive investing.