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NEW DELHI : The assets under management (AUM) of passive investment products will grow eight times from the current levels of 3 trillion to 25 trillion by 2025, according to a report by Finity, a low-cost investment platform. The report also estimates that passive assets will grow to constitute 37% of the overall assets in the mutual fund industry by 2025.

At the end of March, the size of the Indian mutual fund industry was 32.17 trillion (about $416 billion), of which about 10% of assets were in passively managed products.

Passive investing is the most basic form of putting one’s money in mutual funds and the purpose of this style of investment is to mirror the index and not beat it. Two common ways of investing passively in the equity market are to either opt for an index fund or an index exchange-traded fund (ETF). Both essentially mirror an index.

The finding of the latest S&P Indices Versus Active (SPIVA) India scorecard report revealed that as much as 86.2% of Indian equity large-cap funds, 57.1% of mid-/small-cap and 53.7% of the equity-linked savings scheme or (ELSS) funds underperformed their respective benchmarks for the one-year period ending June 2021.

As per Finity’s Passive Investing Report 2021, passive investments have emerged as one of the promising avenues to grow investors’ money.

The report noted that in the last five years, the Indian passive market took off, with assets growing more than 1,200% in absolute terms. From March 2016, passive assets AUM has grown from 22,409 crore to 3,10,330 crore in March 2021, at a compounded annualized growth rate (CAGR) of 69%.

Additionally, passive assets have almost doubled in the last 12 months.

As per the report, the three factors that are contributing to the rising interest in passive investing in India are underperformance of active funds; especially in the large cap category, lower costs of passive funds, and regulatory and government policies that encourage investment in passive investing products.

Abhilash Joseph, business head of Finity, said, “With the entry of fintech companies in the asset management industry, the number of passive funds that are being launched every month is at an all-time high which has resulted into healthy competition and innovation in products. We expect that the total AUM in passive assets will more than double over the next two years."

As of March, the AUM of passive investments as a percentage of overall AUM of mutual fund industry in India was at 10% at the end of March 2021 as compared to 2% at the end of March 2016. This represents a five times growth in five years. Passive funds space is set to grow bigger with growth of the mutual fund industry and piggy backing on India as faster growing economies.

A lot of Indians have joined the investing bandwagon since the start of the covid-19 pandemic. For most investors looking at simpler solutions, passive funds offer the level of simplicity and returns which can match that of an index. A key benefit of passive investing is low cost. A major disadvantage is giving up the choice to outperform the index.

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