Asset management companies (AMCs), which make money by selling investment products, are seeing an increase in the share of less profitable passive schemes in their asset portfolio.
Exchange-traded funds (ETFs) and index funds — two types of passive systems — have doubled their share of the total assets under management (AUM) of the top 10 fund companies over the past three years. They now represent 14% of the total assets under management of these fund management companies, compared to only 7% three years ago.
Passive scheme AUM tripled across the top 10 fund companies from Rs 1.4 trillion in the June quarter 2019 to Rs 4.3 trillion in the June quarter 2022.
Although the EPFO (Employee’s Provident Fund Organization) gave a big boost, the data suggests that these low-cost products have also caught the attention of retail investors.
According to a report by DSP Mutual Fund, the number of retail folios in index funds and non-gold ETFs doubled to 13.8 million in the year ending June 2022.
One of the reasons for their growing popularity is the fact that active funds, especially large-cap schemes, struggle to beat the returns generated by their benchmarks, according to industry players.
As a result, investors increasingly prefer ETFs, where they can both generate higher returns and save on investment costs.
“Many new investors entered the market after the pandemic and they chose liabilities as their investment avenue of choice because of the profitability and transparency they offer,” said DP Singh, Deputy Managing Director and commercial director of SBI MF.
The opening of a large number of post-Covid demat accounts, the rise of direct investment platforms and the acceptance of passive funds among MF distributors have also contributed to a better penetration of these low-cost funds.
“The outperformance of large-cap active funds is declining and as a result investors are starting to question their higher expense ratios. Passive & Product Investments at DSP MF.
According to SPIVA research data published by S&P Dow Jones Indices, 70% of active large-cap funds in India failed to beat their benchmarks in the three-year period ending December 31, 2021.
AMCs have also played their part in popularizing passive funds, despite the fact that margins are lower compared to active funds. They launched 83 index funds and ETFs in FY22 and have already launched 31 programs this fiscal year. The largest fund house, SBI MF, recently launched five passive funds – two equity index funds and three target date funds.
“Revenue is not the only consideration when launching a program.
Launches are higher on the passive side because there is more room to create differentiated products. And the greater the number of products, the better we can meet the differentiated needs of investors,” said Swarup Mohanty, CEO of Mirae Asset Investment Managers.
Even MF distributors have taken to selling passive funds, despite lower commissions. A study conducted by Cafemutual in 2021 found that 45% of MF distributors are willing to recommend passive funds to their clients.
“AMCs have put a lot of effort into popularizing passive funds. Investors are increasingly aware of their benefits. MF distributors have realized that investors are going to invest in these schemes anyway, so why not start to recommend before they go ‘direct’?” said Bharat Bagla, Founder of Bees Network.