Top AMCs see share of less-profitable passive schemes double in 3 years

Of every Rs 100 AUM of top 10 fund houses, ETFs and index funds accounted for Rs 14 in the first quarter of FY23

Asset management companies (AMCs), which make money by selling investment products, are seeing an increase in the share of the less-profitable passive schemes in their asset mix.

Exchange traded funds (ETFs) and index funds–two kinds of passive schemes—have doubled their share in the total assets under management (AUM) of the top 10 fund houses in the last three years. They now account for 14 per cent of the total AUM of these fund houses compared to just 7 per cent three years ago.

The AUM of passive schemes has seen a threefold growth at the top 10 fund houses from Rs 1.4 trillion during the June 2019 quarter to Rs 4.3 trillion during the June 2022 quarter.

Although the Employees’ Provident Fund Organisation (EPFO) has given a big thrust, data suggests that these low-cost products have caught the fancy of retail investors as well.

According to a report by DSP Mutual Fund, the retail folio count in index funds and non-gold ETFs has doubled to 13.8 million during the one-year ending June 2022.

One of the reasons for their growing popularity is the fact that active funds, especially large-cap schemes, are finding it difficult to beat the returns generated by their benchmarks, say industry players.

As a result, investors are increasingly preferring ETFs, where they can generate both higher returns and save on investing cost.

"A lot of first-time investors entered the market post pandemic and they chose passives as a go-to investment avenue because of the cost efficiency and transparency that they offer," said D P Singh, deputy MD & chief business officer of SBI MF.

Opening up of a large number of demat accounts post Covid, the rise of direct investment platforms and acceptance of passive funds among MF distributors also contributed to a better penetration of these low-cost funds.

"The outperformance of active largecap funds is reducing and hence investors are starting to question their higher expense ratios. Further, the opening up of a large number of demat accounts post covid brought many investors to the ETF bandwagon," said Anil Ghelani, head - Passive Investments & Products at DSP MF.

According to SPIVA research data released by S&P Dow Jones Indices, 70 per cent of the active largecap funds in India failed to beat their benchmarks in the three-year period ending December 31, 2021.

AMCs have also played their part in popularising passive funds, despite the fact that margins are lower compared to active funds. They launched 83 index funds and ETFs in FY22 and have come out with 31 schemes already this financial year. The largest fund house, SBI MF, has recently launched five passive funds — two equity index funds and three target maturity funds.

"Revenue is not the only consideration when launching a scheme. The launches are higher on the passive side as there's more room to create differentiated products. And more the number of products, the better we can cater to the differentiated needs of the investors," said Swarup Mohanty, CEO, Mirae Asset Investment Managers.

Even MF distributors have taken to selling passive funds, notwithstanding lower commissions. A study conducted by Cafemutual in 2021 found that 45 per cent of MF distributors are open to recommending passive funds to their clients.

"AMCs have put in a lot of effort in popularising passive funds. Investors are increasingly becoming aware of their advantages. MF distributors have realised that investors are anyway going to invest in these schemes so why not start recommending before they go 'direct'," said Bharat Bagla, founder of Bees Network.