MFs push passive assets, but flurry of schemes don't impress investors

SBI MF's two schemes contribute more than half of overall passive asset base; 55 schemes have less than Rs 100 crore in assets.

With assets of passive products, which include exchange-traded funds (ETFs) and index funds, trebling over the past three years, albeit on a low base, the mutual fund industry has been witnessing a flurry of such offerings -- 18 launches in the past year and another eight lined up this month. But, most such schemes have struggled to garner meaningful assets, with only 22 of 116 passive schemes reporting AUM of over Rs 1,000 crore and as many as 55 having assets less than Rs 100 crore.

The new offerings in the queue include an IT exchange-traded fund (ETF) from Axis Mutual Fund and Nifty Midcap 150 Index Fund and Nifty Smallcap 50 Index Fund from Aditya Birla Sun Life MF. On Tuesday, Nippon MF announced the launch of its Nippon India ETF 5-year Gilt fund, which lets one stay invested in the most liquid five-year gilt at all times.

Despite several new products, underwhelming growth in assets under this space remains a concern. The 22 schemes with more than Rs 1,000 cr assets contribute over 90 per cent to the overall AUM of Rs 2.54 trillion of passive schemes. Two schemes -- SBI ETF Nifty 50 and SBI ETF Sensex -- contribute more than half the overall passive assets base.

What's more, retail investors and corporates are yet to meaningfully take to passive schemes, and most asset growth has been driven by the Employees Provident Fund Organisation (EPFO) and provident funds.

The EPFO had entered the stock market in August 2015. The decision was to invest up to 5 per cent of its investible deposits; this was raised to 10 per cent in 2016 and then to 15 per cent in 2017.

"Fund houses are trying to expand their product bouquet, so that tomorrow if there is a surge in interest in the passive space, they can capitalise on it," said Dhaval Kapadia, director-investment management, Morningstar Investment Adviser. "The distributor push, however, is missing and the awareness about the product will be limited to wealthy investors and some institutional players." 

Most passive funds still focus on the large-cap space, which is where the performance of active schemes has been found wanting in the past, said experts.

The last edition of the S&P Indices Versus Active India Scorecard (SPIVA) revealed that nearly 68 per cent of the actively managed large-cap equity funds in India underperformed the large-cap benchmark over a 10-year period ended June 2020. More than 80 per cent large-cap funds underperformed over the 3- and 5-year periods.

According to Kapadia, investors disillusioned by the performance of large-cap schemes may not necessarily move to passive products but may gravitate to actively managed flexi-cap or midcap schemes, or even equity PMS and direct equities.

It may take a few more years for passive products to garner substantial flows, said experts.

Pradeepkumar G, chief executive at Union MF, believes that passive investment as a concept is at an early stage in India. He says investors are still reluctant to take to such schemes as there are plenty of choices available among active funds which are capable of outperforming the benchmark indices, unlike markets such as the US where most of the active funds are struggling to beat the indices.

"As long as investors continue to see outperformance, active funds will continue to dominate," he said.

One reason passive funds have stolen a march over their active peers in developed markets is the sheer size of MF assets. In the US, for instance, MF holdings comprise about a third of the overall market size. India’s equity mutual funds, on the other hand, still hold less than a tenth of the overall market assets. Add to this the fact that the Indian markets are less efficient and there is a big untapped opportunity for companies to list and grow, providing opportunities to beat benchmarks.

Experts also believe that too many product launches in the passive space can end up confusing investors and may not be in their best interest.

ETFs and index funds try to mimic the securities in their underlying indices, such as Nifty50 or Sensex, in the same weightage. ETFs are traded on stock exchanges.