MFs rediscover the virtues of passivity

With many funds lagging benchmarks, index funds and ETFs become attractive.

Moving away from active management, a clutch of fund houses are planning to launch passively managed funds that include index funds and ETFs (exchange-traded funds).

For the first time, mutual funds (MFs) are showing increased inclination towards passively managed funds after the downturn, when actively managed portfolios were hurt more than index funds.

IDBI Bank, while announcing its MF venture recently, announced it would launch only index funds. “The reason is that they are easy to understand from a retail investor’s perspective and come with lesser expenses than an actively managed fund,” Krishnamurthy Vijayan, CEO of IDBI MF had said at the time of the launch. For a new fund house such as IDBI, it makes all the more sense because costs involved in running the fund are lower.

IDBI is not the only one. Motilal Oswal, which recently got approval to start an asset management business, has filed for a Nifty-based ETF. The underlying index for this is MOSt 50 index, fundamentally an enhanced index based on the S&P CNX Nifty index.

Nitin Rakesh, CEO, Motilal Oswal MF, said, “Markets are becoming more efficient, which makes it all the more difficult to beat the benchmark. With Sebi scrapping the entry load, distributor differentiation for this product has gone. And, the fact that a couple of global players are looking to launch ETFs itself speaks about the importance of this product. ETFs are a huge asset class globally. In India, there is a lot of scope for this product to grow.”

Reliance MF, the largest fund house, has filed for MSCI India Growth ETF and MSCI India Value ETF. These would track the MSCI India index. Sources said a couple of other fund houses, one being Deutsche, are also planning to launch passively managed funds.

Currently, Benchmark MF is the only fund house dedicated to ETFs. It launched a Hang Seng ETF last month and plans to launch an infrastructure ETF.

Experts said a lot of investors became disenchanted with actively managed funds after the market crash as most of them were unable to beat the index. In spite of entrusting their money with professional fund managers, retail investors burnt their fingers, with performance in some cases being worse than the index. According to rough estimates, only 17 per cent funds globally outperform the indices.

“The case for indexing is gaining strength in India if one goes by the numbers. Ten years back, a majority of funds used to beat their benchmarks, but now only 50 per cent funds do that. And, the universe of actively managed funds is so large that it is difficult for investors to figure out which funds are outperforming the indices,” said Dhirendra Kumar, CEO, Valueresearch Online, a fund tracking firm.

Distributors said index funds and ETFs would become more popular once the MF platform of the Bombay Stock Exchange and the National Stock Exchange got active. Currently, although these platforms exist, the number of trades is quite small.

Financial planners and advisors said for somebody with a 10-15 year horizon, index funds made more sense as they would beat actively managed funds due to the lower fee structure. Besides, it gets increasingly difficult to beat the market on a regular basis year after year for a long period of time.