MFs seek Sebi approval for passive funds to tap into flows from smaller PFs

Move to help them tap into provident fund flows; ETFs, index funds could corner higher AUM if the markets stay weak

Mutual fund (MF) players are seeking approval from the Securities and Exchange Board of India (Sebi) for a range of passively managed funds to tap into flows from smaller provident funds. Additionally, MF experts see such products gaining traction if broader markets continue to remain weak. 
 
“Smaller provident funds have also started investing in equity. Currently, they are showing a preference for passively managed funds,” said Kalpen Parekh, president of DSP Mutual Fund (MF). In August 2015, the Employees’ Provident Fund Organisation (EPFO) had started investing in equities through exchange-traded funds (ETFs). 
 
“Smaller provident funds are following the route taken by the EPFO. Fund houses want to capitalise on this additional pool of money and, accordingly, are adding passive products to their offers,” Parekh said.
 
In the current financial year, fund houses have filed scheme information documents (SIDs) for close to a dozen passively managed products.
 
Tata MF has filed SID for a private bank ETF, ICICI MF has filed for a bank ETF, and Axis MF for a Nifty 100 index fund. Motilal Oswal MF has filed SIDs for four funds — Nifty Smallcap 250 fund, Nifty Midcap 150 fund, Nifty bank fund and Nifty 500 fund.
 
Sundeep Sikka, executive director and chief executive officer of Reliance MF, said that while passive products, such as exchange-traded funds (ETFs), are already popular in most matured markets, domestic investors need to be a bit cautious.
 
“Not all ETFs have adequate liquidity on the exchanges. Lower liquidity could lead to higher impact costs. This would limit the benefit of lower costs in such ETFs,” Sikka added.
 
 In June, Reliance MF has filed SID for a Sensex Next 50 ETF, Nifty Midcap 150 fund of funds and a passive flexicap fund (a fund of fund scheme investing in ETFs and index funds of Reliance MF).
 
Experts say fund houses are looking at passive product space aggressively as these products can see increased investor interest amid weak broader markets.
 
“Last year, the market rally was narrow, which led to several actively managed large-cap schemes underperforming. If the trend continues, flows towards passive funds could increase,” said Dhaval Kapadia, director-portfolio specialist at Morningstar Investment Advisors.
 
A study showed that in 2018-2019, of the 384 actively managed diversified equity schemes, 62 per cent underperformed their respective benchmarks.
 
The broader markets have continued to face a difficult time in the current financial year. The BSE benchmark Sensex is marginally higher at over 1 per cent, while the BSE Midcap is down 6.7 per cent.
 
“Mid- and small-caps, which have historically been major drivers for outperformance or so-called alpha for fund managers, are yet to see strong signs of earnings growth. While these stocks saw a spurt in prices after the election results, the strong broader-market rally still looks some time away,” a fund manager said.

Inflexion Point

• The EPFO started investing in equity through ETFs in August 2015 
• Smaller provident funds have started equity investment through ETFs
• Close to a dozen passive products have been filed between April and June
• In 2018-2019, 62 per cent of the 384 actively managed schemes underperformed
• Investors see higher gains in passive schemes in weak broader markets