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Nippon India MF has been in the forefront of the passives revolution in India. In fact, you tied up with Cafemutual to enhance knowledge of distribution community in passives. What’s the rationale for this initiative?
We are among the largest players in the passive space. We manage over Rs. 1.90 lakh crore across 50 passive funds like ETFs, index funds and fund of funds. We also have more than 1.50 crore portfolios and in ETF volumes, we command over 50% on the stock exchanges.
So, there's a certain responsibility on us to keep spreading awareness on passives. We’ve already been doing a lot of development work and this tie-up with Cafemutual is one more step in that direction.
Cafemutual is a platform that a lot of our MFD use for consumption of updates and insights about the MF industry. So, through this collaboration, we hope to continue our initiative of reaching out to partners to promote passives.
How is Nippon India MF supporting MFDs in embracing passive fund distribution?
We have a large ground presence with close to 300 branches. Our teams regularly talk to MFDs, and one topic they bring up are our passive offerings and help partners understand the benefits.
Apart from that, we also do a lot of digital activities as well. One such effort is our video series called Passive Pulse. It's available on YouTube and covers different aspects of passive investing. This includes what the products are, the nuances of passive investing, and why they matter. MFDs can simply look it up on YouTube.
We also publish articles, podcasts, and other resources from time to time, and we make them available through multiple platforms for our MFDs. The tie-up with Cafemutual will give us another solid avenue to take these efforts further.
Passive funds are beating active funds in the USA in terms of AUM, what is your outlook on the future of passives in India?
In India, passive AUM has reached Rs. 11.75 lakh crores. That’s around 17% of the industry, both in AUM and folio count, with over 4 crore folios. That’s a decent number, but we’re still early compared to global markets, where passive AUM is more than 50%.
But we’re growing fast. Over the last five years, passive AUM has grown at a CAGR of 50%, compared to 23% for the overall industry. That means that passives are growing at more than double the pace. So, we are still in the early stages as far as India is concerned. We think that there is a long runway ahead when it comes to passives.
Low-cost funds usually mean lower commissions. But what are the long-term opportunities for MFDs in focusing on passives?
Yes, low cost is one factor but there are many benefits that passives can give to investors. One, is the inabilities of other funds (active funds) to consistently beat the market. The alpha generation itself can be a challenge for funds and therefore to pay a high fee that could come under question from time to time. So, on the other hand, when you invest in passives, you're taking simple exposure to market. You are getting market return but you're not taking any more risk than that.
Two, passives are the real true-to-label funds. If it’s a midcap index fund, 100% goes into midcaps. It does not invest in any other category nor does it take any cash calls. So, you get pure exposure and clarity, which is only possible in passives.
Three, there’s a wide range of options in passives such as value, momentum, quality, low-vol, sectoral, thematic, among others.
Now, regarding commission, there are a lot of index funds, especially smart beta funds, which pay 50–60 basis points, which is not very low. What’s more is a lot of especially very large active funds already are paying fairly low commissions and it keeps coming down, so in this context, 50-60 basis points commission is not bad at all.
What’s good for the investor is ultimately good for the partners too.
Are there gaps that need to be addressed in the passives industry?
Yes, some gaps do exist. For example, many categories including hybrid funds aren’t yet available in passives. That’s one category we could see in the near future emerge.
In the developed markets, you have a whole range of different and innovative offerings. Like, for example, in commodities, while in India we have only gold and silver, in the global markets, we have funds on a whole lot of commodities, such as the cryptocurrency Ethereum or the rare metal palladium.
Likewise, you have inverse ETFs, you have leveraged ETFs. Which are offering 2x, 3x returns, or moving opposite to the market.
Some of these aren’t allowed here yet but over time, as the market matures and regulations evolve, such products may come in. But for now, hybrid passive funds are the next likely step.
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