passive investment, which is the most basic form of investing your money in MFs, aims to mirror the index and not beat it. From 50,000 crore in assets under management (AUM) in 2017, when the overall mutual fund industry was 20 trillion, the share of AUM of passive funds has increased to approx. 6 trillion today.
Speaking at Mint Mutual Fund Conclave 2022, Radhika Gupta, Managing Director and Chief Executive Officer, Edelweiss Asset Management Limited, and Vice-Chairperson, Association of Mutual Funds in India, said that the industry has come a long way from the active versus passive debate. Already happened. , “Today, the passive strategy doesn’t need to challenge or beat the active to prove it’s doable.”
According to DP Singh, Deputy Managing Director and Chief Business Officer, SBI Mutual Fund, the percentage of passive funds will outpace active ones as more and more fiduciary money will come into the older segment.
“But that doesn’t mean people’s interest has turned active. We believe there will be substantial alpha generation opportunities for a decade or, at least, active funds,” Singh said.
As for further growth in Passive Fund, Prateek Oswal, Head of Passive Fund, Motilal Oswal Asset Management Company Limited (MOAMC), said the need of the hour is “adoption”.
“As a fund house, we can invent, but ultimately, customer adoption happens over time. We have 27 index products, and we are inventing. What is needed right now is to go out and educate people about what an index is and how it can really simplify the process of buying equity.”
Singh and Gupta shared similar views stressing the need for simpler products.
“I jokingly say that my large and midcap index fund and a debt fund can meet the needs of most investors.
Meanwhile, Singh suggests that for further growth in passive funds, Indian benchmarks need to become more broad-based. “We still have benchmarks for 30-50 stocks out of 7,000 stocks. There are structural issues, which will be fixed, and new innovations will hit the market,” Singh said.
Two common ways to invest passively in the equity market are to choose either an index fund or an exchange-traded fund (ETF). Both essentially mirror an index.
Keeping in view the emergence of passive funds as an investment product for retail investors, the market regulator has recently capped 2% for tracking error of index funds and ETFs other than debt ETFs/index funds. The tracking difference was set at 1.5%.
When asked whether retail investors have to stick with index funds instead of ETFs for now, Singh said, “It is there, but the expenditure on index funds is generally higher and investors have access to live NAV ( net asset value) and intraday profit.”
Gupta, however, said index funds are a good solution for most investors. “Most Indian investors are doing SIP in index funds. They are long-term buy-and-hold investors. So, an index fund works perfectly fine. The expense may be 5-15 basis points higher, but it’s still a very, very small cost.”
The growth in passive investment has not been limited to equity funds only, but has also extended to debt and commodities. Recently, silver based ETFs were introduced in the Indian market, and a mix of silver and gold has also been launched.
On opportunities in new commodity ETFs like oil, Oswal said, “For products like silver and oil, there’s a lot of demand, but these are still niche.”
On the possibility of passive hybrid schemes like Balanced Advantage Fund, Gupta said such funds are being considered.
Singh said, “BAF is basically an asset allocation fund. Hence, different asset allocation funds may keep coming up where you put in different indexes. So, in asset allocation, you can create many permutations and combinations, and that will happen.”
Over the years, the passive loan category has gained massive popularity. According to industry estimates, the debt ETF and index fund market already has volumes 80,000 crores. Edelweiss MF-managed Bharat Bond ETF, which invests in bonds of government companies, is itself a 50,000 crore program.
“One of the interesting things that the India Bonds program has done is to focus on long-term debt investments. When we started the program, 2023 (Plan), which was a very short and popular series, but we were really struggling to raise money for the 2030 bonds. To date, all major products are 2030, 2031 and 2032. Today, it is about a 15-year product,” said Gupta. Bharat Bond and other target maturity funds have so far focused on government securities, state development loans and AAA bonds.
On the scope of Target Maturity Fund to go deeper into the AA area, Radhika said, “AA&A papers will be great for the growth of the bond market because in the end, ETFs create an additional layer of liquidity. Looking at the framework and the liquidity, I think it’s a very tough case.”
On the new opportunities in international funds, Oswal said, “So far the story has been investing in the US only. But there are many opportunities in emerging markets.”
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