Flows into passive funds steal a March over active schemes in 2HFY21

Officials in the industry say since several large-cap funds have not been generating alpha, investors may be opting for passive funds instead

Domestic mutual fund investors are showing a tilt towards passive funds—schemes that track a benchmark index or a basket of securities or a commodity. During the past six months, passive funds have seen net flows of Rs 27,083 crore. In March, such schemes reported their fifth straight montly inflows. Actively-managed funds, on the other hand, have seen an exodus. While in March, they reported net inflows of Rs 9,115 crore, their six-month net flow tally stands at a negative Rs 36,395 crore.

Industry participants feel that this is the inflection point for passive funds and they could continue to dominate the MF industry for next few years.

The passive product category includes index funds, equity exchange traded funds (ETFs), gold ETFs and fund of fund investing in overseas market.

“We are excited about equity funds witnessing net inflows of Rs 9,000 crore in March, but I am equally more thrilled about passive funds witnessing net inflows of around Rs 8,200 crore. We have seen a fair amount of maturity in the way investors are buying financial assets,” said Swarup Mohanty, chief executive officer at Mirae Asset Management.

Officials in the industry say that several of the large-cap funds not generating alpha could be the major reasons for investors opting the passive funds.

“It is a reality that the number of benchmarks beating funds are narrowing and, in such a scenario, there will certainly shift towards passive funds,” added Mohanty.

To be sure, flows into passive categories have been also been underpinned by new fund offers (NFOs) in both equity as well as debt segments.

Typically, investing in passive funds attracts low-expense ratio compared to active funds, which investment decisions are made at the discretion of the fund manager.

A recent S&P Indices Versus Active (SPIVA) India scorecard for the period ending December 2020, revealed that 81 per cent of Indian equity large cap funds and 65 per cent of the ELSS funds have underperformed their respective indices. Majority of the schemes in the large cap funds, mid and small cap funds and equity linked saving schemes (ELSS) have underperformed their benchmark over a one-year, three-year and five-year period as well.

The surge in passive funds is also due to the increasing surge in demat accounts in the last one year.  Since ETFs are traded on the stock exchanges, one needs to have a demat account.

“Many first-time investors are investing in passive funds as they now have demat accounts, which was not the case earlier. We believe that the passive market is set to grow from here on,” said a senior official from the leading fund house.