HNIs embracing passive funds on under-performance of active funds

High networth individuals (HNIs) are increasingly lapping up passive funds, with their exchange-traded fund asset base registering a 66 per cent growth to Rs 34,000 crore in 2022-23, according to a report on Tuesday.

HNIs are informed investors, and hence, use platforms that allow direct investing in passive funds. Moreover, passive investments are comparatively more attractive than active investments owing to their ease of investing, better liquidity, and lower cost.

According to a report by Motilal Oswal Financial Services, HNIs' ETF AUM rose to Rs 34,000 crore in FY23 from Rs 20,400 crore in FY22, indicating a surge of 66 per cent. It was at Rs 13,700 crore in 2020-21 and Rs 7,500 crore in 2019-20.

Further, HNIs ETF AUM has witnessed a compound annual growth rate (CAGR) of 70 per cent over FY19-FY23. This has resulted in the share of passive AUM (ETFs and Index funds) in the overall asset under management (AUM) increasing to 16.5 per cent in March 2023 from 6 per cent in June 2019.

Moreover, EPFO (Employees Provident Fund Organization) investments in the ETF have been the key driving force of the ETF space.

Going by the report, the contribution of passives to the overall AUM has been picking up momentum in the country with a rampant belief of massive underperformance of active funds as compared to passive funds. In terms of returns, analysis shows that the 1-year, 3-year and 5-year returns for large-cap active equity schemes and ETFs are not materially different, it added.

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange. The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange.

In addition to ETF, In the index funds too, HNIs have witnessed an AUM CAGR of 145 per cent over the past four years. Apart from HNIs, retail AUM in ETFs has posted a CAGR of 56 per cent over FY19-23 to Rs 9,700 crore in FY23.

The growth has been driven by a thrust from online distributors. However, the share of ETFs in retail total AUM is a meagre 2 per cent. This is because the Indian retail MF industry is highly dependent on the push model, wherein mutual fund distributors play an integral part in distribution, the report pointed out.

"With commissions to distributors on equity schemes being much higher, the preference for distributing ETFs is much lower," it added.

Further, the corporate segment accounts for 91 per cent of the total ETF AUM. The corporate ETF AUM is dominated by T30 cities, accounting for 99 per cent share. Within T30 cities, more than 70 per cent of the corporate AUM is through direct channels.

Overall, the asset under management of the mutual fund industry was Rs 40 lakh crore as of March 2023. Of this, ETF (including Gold ETF) has an asset base of over Rs 5 lakh crore.