Index Funds are the go-to choice for India's young investors, shows survey

Index funds are the more popular among Gen Z and Millennials, with 46-48% of investors under 43 favouring them, compared to 35 per cent among Gen X and Boomers, revealed a survey by Motilal Oswal Asset Management Company.

 

An index fund is a type of mutual fund that aims to replicate the performance of a specific stock market index, like the Nifty 50 or Sensex. These indexes represent a collection of the top companies listed on the Indian stock market. So, when you invest in an index fund, you're essentially buying a small portion of all the companies in that index.

 

Let’s say you invest in a Nifty 50 index fund with Rs 10,000. The Nifty 50 is made up of 50 top companies like Reliance, HDFC Bank, Infosys, etc. Your Rs. 10,000 gets divided across these companies in the same proportion as they appear in the Nifty 50 index. If the Nifty 50 index grows by 12% in the year, your investment would grow by approximately the same amount.

 

Sectoral indices remain a top choice among Index funds, with a marked preference for Indian sectoral indices over commodities and smart beta funds among younger and middle-aged investors, said the survey.

 

Passive funds in India have seen an extraordinary surge, with their Assets Under Management (AUM) soaring to over Rs 11 trillion by September 2024—marking a 1.5x increase year-on-year. 

 

Pratik Oswal, Chief of Passive Business at Motilal Oswal AMC, explains, “Passive funds have grown exponentially over the last year, with Millennials and Gen Z driving much of this momentum. Unlike active funds, which require constant monitoring, passive funds offer a more relaxed investment style that suits a long-term horizon. The future looks bright for passive investing, and we anticipate a further 15% increase in investor allocation towards these funds in the coming years.”

 

A vast majority (98%) of investors are aware of passive funds. However, 58% still have a basic understanding of how they work. Index funds are by far the most popular form of passive investing, with 74% of investors favoring them. Of these, 43% invest exclusively in index funds, while 31% combine both index funds and Exchange-Traded Funds (ETFs), noted the survey which got  responses from over 3,300 mutual fund investors. 

 

Investment Behaviour:

• Social media and self-research play a significant role in guiding passive fund investors, whereas active investors rely more on friends and financial advisors.
• Passive fund investors typically review their portfolios quarterly, a more relaxed approach than active investors who prefer monthly reviews.
• 82% of investors have a long-term investment horizon for passive funds, planning to hold for more than three years.

 

Portfolio Composition:

• 40% of passive fund investors allocate 10-30% of their portfolios to passive funds, with 80% of investors having increased their allocation in the past year, especially among Gen Z.
• On average, investors hold 8-9 funds, with 71% holding 1-10 passive funds.

 

Future Allocation:

Investors anticipate a potential 15% increase in their allocation towards passive funds in the near future.