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Business News/ Mutual Funds / More adoption will grow passive MF industry

More adoption will grow passive MF industry

Mutual fund industry leaders discuss the merits of passive investing and point to the need for continuous user education to promote it

(L-R) Neil Borate, deputy editor, Mint, Pratik Oswal, head of passive funds at MOAMC; DP Singh, deputy MD and CBO at SBI Mutual Fund; and Radhika Gupta, MD & CEO, Edelweiss MF; at the Mint Mutual Funds Conclave 2022. MintPremium
(L-R) Neil Borate, deputy editor, Mint, Pratik Oswal, head of passive funds at MOAMC; DP Singh, deputy MD and CBO at SBI Mutual Fund; and Radhika Gupta, MD & CEO, Edelweiss MF; at the Mint Mutual Funds Conclave 2022. Mint

The demand for passive investing  has grown exponentially over the past few years, even as innovations have ensured that mutual funds (MF) now meet the needs of most investors. What is now needed, according to industry leaders, is continuous user education to promote further adoption of passive MF schemes.

Passive investing, which is the most basic form of putting one’s money in MFs, aims to mirror the index and not beat it.  From 50,000 crore in assets under management (AUM) in 2017, when the overall mutual fund industry stood at 20 trillion, the share of passive funds’ AUM has grown to around 6 trillion today. 

Speaking at the Mint Mutual Funds Conclave 2022, Radhika Gupta, managing director and chief executive officer, Edelweiss Asset Management Ltd,  and vice-chairperson, the Association of Mutual Funds in India, said the industry has come a long way from active versus passive debate. “Today, the passive strategy doesn’t need to challenge or beat active to prove that it’s noteworthy." 

According to DP Singh, deputy managing director and chief business officer at SBI Mutual Fund, the percentage of passive funds will outpace the active eventually as more and more fiduciary money will come into the former segment. 

“But that doesn’t mean that the interest of people has gone down into active. We believe that for a decade or, at least, there will be enough alpha generation opportunities in active funds," said Singh. 

For further growth in passive funds, Pratik Oswal, head of passive funds, Motilal Oswal Asset Management Company Ltd. (MOAMC) said the need of the hour is “adoption". 

“As a fund house, we can invent, but ultimately, customer adoption happens over time. We have 27 index products, and we’ve been inventing. The need right now is to go out and educate people on what index is, and how it can really simplify the equity buying process," said Oswal. 

Singh and Gupta echoed similar views while emphasizing the need for simple products. 

“I keep joking that my large and mid-cap index fund and one debt fund can solve the need for most investors," said Gupta. 

Singh, meanwhile, suggests that for further growth in passive funds, Indian benchmarks need to become more broad-based. “We still have the benchmarks for 30-50 stocks out of 7,000 stocks. There are structural issues, which will get fixed, and new innovations will come into the market," said Singh. 

Two common ways of investing passively in the equity market are to either opt for an index fund or an exchange-traded fund (ETF). Both essentially mirror an index. 

Considering the emergence of passive funds as an investment product for retail investors, the markets regulator recently introduced a ceiling for the tracking error of index funds and ETFs other than debt ETFs/index funds at 2%. The tracking difference was set at 1.5%. 

When asked if a solution for retail investors, for now, is to stick with index funds instead of ETFs, Singh said, “That is there, but expenses on index funds are generally higher and investors don’t have live NAV (net asset value) and intraday benefits." 


Gupta, however, said that index funds are a good solution for most investors. “Most Indian investors are doing SIPs in index funds. They are long-term buy-and-hold investors. So, an index fund works perfectly fine. The expense may be 5-15 basis points more, but it’s still a very, very small cost."

The growth in passive investing has not been limited to equity funds but has extended to debt and commodities as well.  Recently, silver-based ETFs were introduced in the Indian market, and a blend of silver and gold has also been launched. 

On opportunities in newer commodity ETFs such as oil, Oswal said, “For products like silver and oil, there’s a lot of demand, but these are still niche. " 

On the possibility of a passive hybrid scheme like a balanced advantage fund, Gupta said such funds are on the anvil. 

Singh opined, “BAF are basically asset allocation funds. So, different asset allocation funds can keep on coming, where you put in different indexes. So, in asset allocation, you can make a number of permutations and combinations, and that will keep on happening." 

Over the past few years, the passive debt category has gained popularity in a big way. As per industry estimates, the debt ETF and index fund market already commands a volume of 80,000 crore. Edelweiss MF-managed Bharat Bond ETF, which invests in bonds of government companies, is itself a 50,000 crore program. 

“One of the interesting things that the Bharat bond program has done is to put the spotlight on long-term debt investing. When we started the program, 2023 (scheme), which was a very short and popular series but for the 2030 bond we really struggled to raise money. Cut to today, all big products are 2030, 2031 and 2032. Today, it is about can we do a 15-year kind of product," said Gupta. Bharat bond and other target maturity funds have so far largely focussed on government securities, state development loans and AAA bonds. 

On scope for target maturity funds going deeper into the AA arena, Radhika said, “Having AA and A papers would be very good for the development of the bond market because finally, ETFs create an extra layer of liquidity. But given the regulatory framework and liquidity in these papers, I see that is a very hard case." 

On newer opportunities in international funds, Oswal said, “The story so far has only been investing in the US. But there are many opportunities in emerging markets."

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Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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Updated: 29 Aug 2022, 06:28 AM IST
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