Passive funds: A growing industry

Despite the pandemic and the initial waves of turmoil, the global asset management industry amassed $103 trillion US dollars, growing at 11% (Source: BCG Global Report 2021). Globally, markets bounced backed with healthy returns. Leveraging several opportunistic strategies and differentiating capabilities, even the mutual fund industry in India registered a positive uptick on several parameters.

Since the previous financial year, the Indian mutual fund industry has showcased its resilience and potential to grow exponentially. Surprising many retail investors, this wave has been led by passive investment instruments.

As the performance of actively managed funds left a lot to desire for, passive funds grew 17% globally (Source: BCG Global Report), thanks to strong new inflows and market growth. The little over 4x (Source: Finity Report 2021) growth witnessed by passive investments in the last decade or so has led to the rise of interest in passive products such as Fund of Fund, Index Funds, and ETFs.

In fact, mounting on the back of strong demand from consumers, government push, increased awareness initiatives by fund houses and influencers, and benchmark performance, AMCs have launched multiple innovative passive products in India..

As of September 2021, there were around 160 passive schemes in India. According to a report by Finity, passive assets under management (AUM) have grown from Rs 22,409 crore in 2016 Rs 3.10 lakh crore in March 2021, at a CAGR of 69%.(Source: Finity Report 2021)

The positive rally is expected to continue in the coming years. Below are some of the key trends that will not only transform the passive investing landscape in India but also be instrumental in delivering returns.

Emergence of Goal Based Investment Products

While the concept of goal-based investing is not new to India, fund managers can now focus on creating passive investment products that are linked directly to investors goals. Maybe the future will witness ETFs that are directly focused on retirement, higher education, etc. These easy to understand products that track the benchmark will perform according to the index and give predictable returns to the investors. Now, sustainable and socially responsible practices are also coming at play, creating a marked change in how investors and fund managers approach their investment portfolio and its composition.

Evolved Investor Attitude

One of the key reasons for the growth of passive investments in India is the evolved attitude of the investors. As they have started taking an active interest in their portfo lios, they are expecting more from mutual fund houses. Automation, technology, and the emergence of online platforms has resulted in a new sophistication to the asset management landscape in India, leading to an increase in folios and investor expectation

Innovative Quotient of Products

Right from the Nifty Next 50 Index that allows investors to participate in the growth of future market leaders to the introduction of the Bond ETF that invests in the bonds market - India has come up with a series of new innovative products that have boosted the passive landscape in India in the last few years. As fund houses create these innovative products, they will get a distinctive edge over others

Acceptance of Smart Beta Products

Unless you have been living under a rock, you would know that smart-beta funds have taken the investment world by a storm, globally. This wave is catching up in India as well. Product managers too have evolved from their traditional approaches to launch Smart-Beta ETFs (that offer investors the dual benefit of active and passive investing strategies to secure a relatively higher alpha at a low-cost strategy). Just like a passive fund, they have the advantage of having a transparent portfolio composition and follow the benchmark index. But, investors resonate better with Smart-Beta ETFs due to the hand-picked nature of the portfolio. Although it is yet to gain the necessary traction in India, its increased acceptance will be crucial from the passive investing paradigm.

Regulatory Push

Regulatory measures have acted nothing short of a catalyst in spurring the growth of passive investments in India. Certain strategies such as the government’s disinvestment drive through ETF or benchmarking to total return indexes have worked in the favour of investors and fund houses.

As the world steps into the new normal, one can expect investors to prioritize good valuations and long term returns that will meet their objective. A hybrid model (that delivers the dual value of active and passive investing strategies) might take root adding more to customer returns and experience.

(The writer is Head Products & Alternatives, Axis AMC)