Despite market volatility amid a weakening rupee and rising oil prices, in 2018 the systematic investment (SIP) flows from retail investors grew 42% over the previous year to ₹ 7,985 crore in October.
The mutual fund space now has 2.5 crore SIP accounts. In the current fiscal, over 10 lakh SIP accounts were added each month on an average, with an average ticket size of ₹ 3,200, according to Association of Mutual Funds of India (Amfi) data.
This year we also saw increasing awareness and demand in the passive space.
In a way, the growth of the passive industry in India over the past decade sounds impressive from ₹ 9,000 crore in 2008 to over ₹ 1 lakh crore in August 2018. However, it still accounts for less than 5% of ₹ 25 lakh crore Indian mutual fund assets. Active fund management in India has a much longer history and demand due to its potential to outperform the benchmark.
Mutual fund regulator Securities and Exchange Board of India (Sebi) has also been pushing for increased transparency by focusing on lowering expense ratios and deepening mutual fund product offerings.
Scheme re-categorization that has come into effect since April 2018 and move from price returns index to total returns index for benchmarking performance are some of the changes that will augur well for the passive segment.
Additionally, ETFS and index funds are expected to get a further boost with Sebi’s focus on advisory models and driving the growth of direct plans to increase retail participation.
However, I would not write off active funds at any point in time, it is too early in my view.
No doubt, large caps will face a bit more challenge in terms of generating alpha.
The overall expense ratios are also coming down because Sebi has recalibrated expense structures as per the slabs of mutual fund AUM. There is some amount of collapse of expense that is happening in the traditional active funds as well. We will have to wait and watch to see how it progresses.
Investors don’t have to restrict themselves to choosing between active and passive investment strategies.
Investors anywhere in the world including India move towards what has given returns in recent times.
In recent times, over the last three to five years, equities have generated higher returns and hence we are seeing flows going into that as an asset class. The rupee had a large bout of weakness this year, which saw many investors finding favour with international mutual funds.
There were periods of time when gold did well. These are cycles and investors will calibrate their portfolios depending on how cycles move. I would always urge investors to look at a combination of multiple asset classes and in predefined exposure to each asset class, so that the asset allocation principle remains intact.
Having exposure to equities, fixed income and gold as a combination is the right framework for a long-term investor. Market volatility is something we should all be prepared for and having a good advisor who can guide one through these phases would be a game changer.
Kalpen Parekh, president of DSP Investment Managers Pvt. Ltd