This growth is a testament to the increasing popularity and acceptance of passive investing among Indian investors. While passive funds have been stable in developed markets like the US, their performance in emerging markets, especially India, has lagged in the past.
However, the narrative seems to be changing as these funds are finally receiving recognition for their value.
Why it Worked for Investors
Several factors have contributed to the success of passive funds in India:
Resilience and Steady Performance:
Passive funds have shown resilience and steady upward movement in line with broader market indices. Since there is no active management involved, fund managers invest only in the stocks that the underlying index holds, aiming to replicate its exact returns.
For instance, passive funds tracking the broader indices from September 2014 to August 2024 will have similar returns as the broad-based indices. They have delivered double-digit returns: Nifty 50 TRI returned 13.5%, Nifty Large Midcap 250 TRI returned 17.4%, Nifty Midcap 150 TRI returned 20.6%, Nifty Smallcap 250 TRI returned 17.7%, and Nifty 500 TRI returned 15.2%.
Therefore, even during market downturns, passive funds will decline when the market corrects. Due to their ability to move in tandem with the indices, they have weathered market volatility and become a preferred choice for many investors.
Increased Investor Awareness:
There has been a significant rise in investor awareness about the benefits of passive investing. This awareness has been bolstered by regulatory support, such as the introduction of the MF Lite framework, which has made it easier for investors to access and invest in passive funds.
Technological Advancements:
The rise of fintech platforms has also played a crucial role in the popularity of passive funds. These platforms have simplified the investment process, making investing more accessible and convenient for a broader audience. Data shows that the amount of Rs 5,696 crore garnered in passive funds in the first half of this year is almost equivalent to the total inflows in the same category for the entire previous year.
Cost-Effectiveness and Transparency:
Passive funds are known for their low cost and transparency. These attributes, combined with a wide range of offerings across equity and debt, have provided investors with more choices and better value for their investments.
The Future Potential of Passive Funds
The future of passive funds in India looks promising. Here are some signs that are making this possible:
Asset Allocation Strategies: Investors are increasingly using passive funds as part of their asset allocation strategies, particularly in a core-satellite mix. This approach allows for a stable core investment with the flexibility to explore higher-risk opportunities.
New Themes and Benchmarks: The industry is exploring new themes and creating new benchmarks with passive offerings. Recent introductions like the Nifty Tourism Index and the Nifty Capital Markets Index are designed to cater to evolving investor preferences by providing exposure to specific sectors poised for growth.
Broadening Investment Opportunities: The creation of new indices is a significant step forward in broadening the scope of passive investment opportunities in India. These indices are designed to meet the changing needs of investors and provide exposure to sectors with high growth potential. This marks a significant advance in expanding the options available for both retail and institutional investors, allowing for more targeted strategies to participate in emerging economic themes.
Conclusion
In conclusion, the rise of passive funds in India reflects the changing preferences of investors. Alongside active funds, passive funds are now forming an integral part of investors’ portfolios. With their resilience, cost-effectiveness, and growing popularity, these funds are set to play a crucial role in the future evolution of investing in India.
(The author DP Singh is Deputy MD & Joint CEO at SBI Mutual Fund. Views are own)
However, the narrative seems to be changing as these funds are finally receiving recognition for their value.
Why it Worked for Investors
Several factors have contributed to the success of passive funds in India:
Resilience and Steady Performance:
Passive funds have shown resilience and steady upward movement in line with broader market indices. Since there is no active management involved, fund managers invest only in the stocks that the underlying index holds, aiming to replicate its exact returns.
For instance, passive funds tracking the broader indices from September 2014 to August 2024 will have similar returns as the broad-based indices. They have delivered double-digit returns: Nifty 50 TRI returned 13.5%, Nifty Large Midcap 250 TRI returned 17.4%, Nifty Midcap 150 TRI returned 20.6%, Nifty Smallcap 250 TRI returned 17.7%, and Nifty 500 TRI returned 15.2%.
Therefore, even during market downturns, passive funds will decline when the market corrects. Due to their ability to move in tandem with the indices, they have weathered market volatility and become a preferred choice for many investors.
Increased Investor Awareness:
There has been a significant rise in investor awareness about the benefits of passive investing. This awareness has been bolstered by regulatory support, such as the introduction of the MF Lite framework, which has made it easier for investors to access and invest in passive funds.
Technological Advancements:
The rise of fintech platforms has also played a crucial role in the popularity of passive funds. These platforms have simplified the investment process, making investing more accessible and convenient for a broader audience. Data shows that the amount of Rs 5,696 crore garnered in passive funds in the first half of this year is almost equivalent to the total inflows in the same category for the entire previous year.
Cost-Effectiveness and Transparency:
Passive funds are known for their low cost and transparency. These attributes, combined with a wide range of offerings across equity and debt, have provided investors with more choices and better value for their investments.
The Future Potential of Passive Funds
The future of passive funds in India looks promising. Here are some signs that are making this possible:
Asset Allocation Strategies: Investors are increasingly using passive funds as part of their asset allocation strategies, particularly in a core-satellite mix. This approach allows for a stable core investment with the flexibility to explore higher-risk opportunities.
New Themes and Benchmarks: The industry is exploring new themes and creating new benchmarks with passive offerings. Recent introductions like the Nifty Tourism Index and the Nifty Capital Markets Index are designed to cater to evolving investor preferences by providing exposure to specific sectors poised for growth.
Broadening Investment Opportunities: The creation of new indices is a significant step forward in broadening the scope of passive investment opportunities in India. These indices are designed to meet the changing needs of investors and provide exposure to sectors with high growth potential. This marks a significant advance in expanding the options available for both retail and institutional investors, allowing for more targeted strategies to participate in emerging economic themes.
Conclusion
In conclusion, the rise of passive funds in India reflects the changing preferences of investors. Alongside active funds, passive funds are now forming an integral part of investors’ portfolios. With their resilience, cost-effectiveness, and growing popularity, these funds are set to play a crucial role in the future evolution of investing in India.
(The author DP Singh is Deputy MD & Joint CEO at SBI Mutual Fund. Views are own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
