Passive assets more than triple in three years on steady PF inflows

But active investment still holds the edge among individual investors

The assets of passive products that include exchange-traded funds (ETFs) and index funds have more than tripled in the past three years, on the back of steady inflow from the Employees Provident Fund Organisation (EPFO) and provident funds.

ETFs and index funds try to mimic the securities in their underlying indices such as Nifty 50 or Sensex 30, in the same weightage. ETFs are traded on stock exchanges. 

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.

Polarisation has been a consistent theme for the past two years, leading to underperformance of funds, especially large caps. This has also led fund houses to look at passive products more closely. This year has seen 14 ETFs and 5 index funds getting launched (including five ETFs and one index fund since October) that have garnered assets in excess of Rs 11,600 crore. 

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

“The myth of generating alpha has been debunked in the last one year. Investors are willing to allocate 5-10 per cent of their equity portfolio to index funds and ETFs, which was not the case earlier,” said a senior industry official.

"What we have learnt from the West and is increasingly evident in the Indian landscape as well is that there is a large enough market for active strategies as well as passive funds. Today our product basket is embracing this fact as well," said Chandresh Nigam, CEO, Axis MF, which has recently filed for a series of sectoral ETFs and is increasing its emphasis on passive solutions in a niche manner. 

That said, industry observers believe that active fund management still holds an edge in generating long-term alpha, and passive products are yet to become popular among retail investors. Individual investors still hold less than 1.4 per cent of the Rs 14.42 trillion assets held by them in mutual funds as of September 2020, data from Association of Mutual Funds in India shows. 

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 one-tenth per cent of the overall market assets.

"Active investing remains a source of wealth creation simply because unlike some markets in the West, India has a large untapped opportunity for companies to list and grow. Coupled with the fact that markets are yet less efficient, this provides scope to beat benchmarks. We have proven that with our active strategies over reasonably long periods of time," said Nigam.  

According to Swarup Mohanty, CEO, Mirae Asset Global Investments (India),  which launched a passively managed ETF tracking the ESG theme last month, India's in a sweet spot right now where both active and passive funds can coexist. “It’s a 50-50 story right now. The  moment the market turns 75:25 in favour of passives, that’s when the story will change. It’s great that we have time before that happens," said Mohanty.