‘Active and passive strategies will co-exist’2 min read . Updated: 18 Oct 2020, 10:05 PM IST
- Currently there are 104 passive funds managing around ₹1.82 trillion worth of assets, as of October end
- Despite the growing size of passive funds, they will co-exist with active funds, according to experts
Active versus passive investing is an ongoing debate, and has gained prominence in recent times as active funds, especially in the large-cap category, have struggled to create alpha over passive funds in the same category. Also, the size and scale of passive funds has gone up. According to data from Value Research, currently there are 104 passive funds managing around ₹1.82 trillion worth of assets, as of October end.
Despite the growing size of passive funds, they will co-exist with active funds, according to experts speaking at the Mint Money Conversation, presented by digibank by DBS, on 14 October. They said healthy competition between active and passive funds within categories should be encouraged going forward.
Passive funds invest in the same stocks in the same proportion as the index. No active efforts in stock selection means lower cost of these funds which benefits investors. In case of active funds, the fund manager takes active stock- and sector-related decisions to generate an alpha or outperformance over the benchmark, which is why their cost is higher.
Rajeev Thakkar, chief investment officer (CIO), PPFAS Mutual Fund, said “I think there will be three product categories. One will be pure passive, where index funds and exchange-traded funds (ETFs) just mirror the indices. Two, with a formula- or algo-driven approach, there will be funds that are a blend of active and passive investing. Three, traditional active investing kind of approach." This will increase competition, he added.
Jinesh Gopani, head of equity, Axis Mutual Fund, agreed. “I think passive will be more of a mass retail kind of a product for investors who don’t know much about the markets and the risk management systems, whereas active will be more for educated investors," he said.
Mrinal Singh, deputy CIO, equity, ICICI Mutual Fund, said active funds will flourish if the fund manager’s strategy is able to justify the cost. “Active funds will have to be watchful of the expenses," he said.
However, active funds have underperformed recently. Some believe it could be attributed to the 10% cap that active funds have on a single stock allocation. There is no such cap in case of index funds as they have to mimic the benchmark. Gopani suggested that a regulatory solution could be found. “Regulators in countries like South Korea allow active funds to have allocation of more than 10% to a single stock like Samsung which has an allocation of more than 15-16% in the index. So, these limits can be changed," he added.
It was reported recently that representations were made to Sebi to allow fund houses to allocate more than 10% in stocks which have higher weightages in the index or devise a new index with capping to individual stocks, the Association of Mutual Funds of India has denied any such representation was made.
Understand the risk-return matrix of active and passive funds before investing.