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The Rise and Rise of Passive Investing in India

Want to know how to start with passive investing? Here is all you need to know about passive investing, its meaning, strategies, how it works and who should invest in it.
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Recently, a report by SPIVA findings showed that more than 80% of the large-cap active funds failed to beat the S&P BSE 100 Index (based on data as of 30th June 2021). The above statistic is one of the biggest reasons why more and more people prefer to invest in index funds these days rather than active funds. Hence, passive funds have seen a big rise in the number of folios and AUM. This blog focuses on the rise of passive investing in India.

The above table shows how more than 80% of the large-cap active funds have failed to beat the S&P BSE 100 Index on one, three, and five-year returns. The same is the case with ELSS funds, where more than 50% of the active funds have underperformed the S&P BSE 200 Index. More than 50% of the active funds have underperformed the S&P BSE 400 MidSmallCap Index in the mid and small-cap space on one and five-year returns.

Due to the above underperformance of active funds, investors wonder whether it is worth paying the high fund management fees in the form of a high expense ratio for these active mutual funds. So then, is shifting to passive investing a better option? The rising statistics of passive investing seem to suggest so. Let us look at what are index funds and the rise of passive investing in India in the last few years.

What are Index Funds?

An index fund is an open-ended fund that invests in all the constituents of an index as per their weightage in the index. For example, a Nifty 50 Index Fund invests in all the 50 constituents of the Nifty 50 Index as per their weightage in the Nifty 50 Index. An index fund is also known as a passive fund. An index fund mirrors or replicates the performance of a benchmark index.

Investors can invest in index funds based on various indices such as:

  • Nifty 50 Index
  • Nifty Next 50 Index
  • Nifty 100 Index
  • Nifty Midcap 150 Index
  • Nifty Smallcap 250 Index
  • Nifty 500 Index etc.

Investing in index funds is useful for:

  • Investors who are happy with market risk and market returns rather than taking an additional risk and outperforming the markets
  • Investors who are looking to invest at a low cost rather than the higher expense ratios of active funds
  • Investors who want to invest in all the constituents of an index and remove fund manager bias related to which stocks to buy, how much, when, and at what price. The same applies to fund manager bias for selling.
  • Investors who are looking for a diversified investment portfolio offered by broad market indices.

Passive investing: Growth in Assets Under Management (AUM)

Now that we understand what index funds are and who should invest in them, let us see how they have grown in India in the last few years.

The AUM of passive schemes has grown to Rs. 4.6 lakh crores, now forming 11.8% of the total mutual fund industry AUM. Five years back, in March 2017, passive investing AUM was just Rs. 50,000 crores. The AUM has grown more than nine times to Rs. 4.6 lakh crores. Similarly, five years back, passive investing formed just 2.8% of the overall mutual fund AUM, which has grown four times to 11.8% now. The year-on-year (from January 2021) growth in AUM is 56%.

Passive investing AUM includes index funds, gold exchange-traded funds (ETFs), and other ETFs (equity and debt). In the last one year, index funds’ AUM saw a growth of three times, gold ETFs grew 2.5%, and other ETFs grew 49%. So, in the last one year, investors have favoured index funds over gold ETFs and other ETFs.

Growth in passive customer folios

In the earlier section, we saw how the passive investing AUM had seen massive growth in the last few years. The growth is happening because more and more people are choosing passive investing over active investing. So, let us now look at the growth of passive customer folios.

The passive customer folios have grown to 12 crores and now form 12% of the overall mutual fund industry customer folios. Five years back, in March 2017, the number of passive customer folios was just 5.5 crores. The number of passive customer folios has more than doubled to 12 crores. Similarly, five years back, passive customer folios formed just 2% of the overall mutual fund industry folios, which has grown six times to 12% now. The year-on-year (from January 2021) growth in passive customer folios is an impressive 167%.

Growth in customer folios within the passive investing category

We saw how the overall passive investing category has grown in the earlier section. Now, let us look at the segment-wise growth in passive investing.

Segment-wise break of passive investing portfolios

The passive customer folios grew 5.8% on a month-on-month basis, while the overall mutual fund industry folios grew 1.5%. The year-on-year growth in passive customer folios is as follows:

  1. Index funds folios saw a growth of 144% y-o-y
  2. Gold ETF folios saw a growth of 250% y-o-y
  3. Other ETF folios (equity and debt) folios saw a growth of 147% y-o-y

The growth in the number of passive schemes and the wider investment options for the customer has enabled the growth in passive investing customer folios and AUM. As of January 2022, there are 196 passive schemes available for investors to choose from.

Smart beta indices: Blend of active and passive investing

The NSE has started offering various factor-based indices in the last few years. These indices are a blend of active and passive investing:

  1. They have the potential to beat the broad market capitalisation indices (for example, Nifty 50 Index), which is what we expect from large-cap active funds
  2. They have a low expense ratio just like passive funds

Some of these smart beta indices and the passive schemes based on these indices include:

  1. Nifty 100 Low Volatility 30 Index – ICICI AMC ETF and Index Fund
  2. Nifty 200 Momentum 30 Index – UTI and Motilal Oswal AMC ETF and Index Fund
  3. Nifty Alpha Low Volatility 30 Index – ICICI AMC ETF
  4. Nifty 100 Quality 30 Index – Edelweiss and SBI AMC ETFs

Performance of index funds

In the earlier sections, we have understood the various indices, investment options, AUM growth, customer portfolios, etc. Now let us look at the returns given by index funds.

Scheme nameAUM (Rs. crores)1-year2-years3-years
IDFC Nifty Fund3698.69%21.55%15.48%
UTI Nifty Index Fund6,0118.77%21.13%15.32%
HDFC Index Fund4,6278.71%20.99%15.18%
UTI Nifty Next 50 Index Fund1,5069.54%21.27%13.94%
ICICI Prudential Nifty Next 50 Index Fund1,8689.39%20.86%13.47%
DSP Nifty Next 50 Index Fund1789.50%20.72%13.36%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/index-fundsetfs.html)

Note: The returns are as of 04 March 2022. The returns are for direct plans with growth option. The one-year returns are absolute, and two and three-year returns are CAGR. The funds have been ranked based on three-year returns.

Scheme nameAUM (Rs. crores)3-months6-months1-year
Nippon India Nifty Midcap 150 Index Fund267-9.27%-4.90%11.98%
Motilal Oswal Nifty Midcap 150 Index Fund464-9.21%-4.83%11.95%
Aditya Birla Sun Life Midcap 150 Index Fund61-9.19%-4.78%NA
Motilal Oswal Nifty Smallcap 250 Index Fund257-7.45%-2.26%21.12%
Aditya Birla Sun Life Nifty Smallcap 50 Index Fund44-13.10%-13.30%NA

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/index-fundsetfs.html)

Note: The returns are as of 04 March 2022. The returns are for direct plans with growth option. The three months, six months, and one-year returns are absolute. The funds have been ranked based on one-year returns.

Passive investing has a long way to go in India

In some developed economies like the US and Japan, the share of passive funds is either close to that of active funds or has already surpassed them. In India, the share of passive funds is 12% of the overall mutual fund industry. However, in the last few years, the annual growth of passive funds has been higher than that of active funds. Fund houses have launched broad market capitalisation index funds, sectoral index funds, and smart beta ETFs and index funds. Apart from equity ETFs and index funds, investors can also invest in gold ETFs, debt ETFs, and debt index funds. With a wide variety of index ETFs and index funds to choose from, passive investing will continue growing in India at a faster pace in the foreseeable future.

Investing in index funds with the Glide Invest App

In the above section, we understood how index funds are gaining popularity among investors in India. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate index fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals. 

With Glide Invest, you will get guidance for:

  • A personalised risk profile assessment
  • Identifying your financial goals
  • Appropriate asset allocation
  • Making a financial plan for each goal
  • Automating the financial plan
  • Review and analysis of your financial plan 
  • Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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