Amidst heightened volatility and uncertainty, mutual funds see surge in Index and ETF filings
Experts further add that another reason making this space attractive to large fund houses is the wide variety of options, including sector funds, broad-based funds (spanning large, mid, small, and flexi-cap categories), and factor strategies like Smart Beta.
India’s mutual fund industry is seeing substantial growth in passive fund activity, particularly in index funds.
During the July to September 2024 period, draft documents filed for ETFs surged by 233 percent, rising from 6 in the same period last year to 20 this year, driven by both large players and new fund houses. Index funds also grew by 300 percent, from 9 in 2023 to 36 in 2024.
The total draft filings, including categories like sectoral and thematic funds, grew by 139 percent, from 38 in 2023 to 91 in 2024.
Sirshendu Basu, Head – Products, Bandhan AMC suggests that this shift is directed by available opportunities.
“If you compare this with the US markets or how passive investing really grew there, it was driven by diminishing alpha in the active space. In contrast, the Indian market still has room for alpha, meaning that the coexistence of active and passive strategies will continue here until alpha opportunities disappear,” he says.
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In a similar context, Vikash Wadekar, Head of Passive Business at Axis Mutual Fund says that passive funds have come a long way over the last decade with the AUM of such funds skyrocketing from Rs 10,000 crore in 2014 to over Rs 10,00,000 crore as of July 2024 – a growth fueled by increasing awareness.
“This has been possible due to increasing awareness among investors, advisors and a positive regulatory environment. AMCs have also played a key role by offering more than 150 unique investment opportunities with more than 400 passive funds. By the middle of this financial year itself 60 new passive funds were launched, predominantly Equity oriented,” Wadekar said.
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Experts further add that another reason making this space attractive to large fund houses is the wide variety of options, including sector funds, broad-based funds (spanning large, mid, small, and flexi-cap categories), and factor strategies like Smart Beta.
“The diversity of options in this space provides a range of opportunities for both investors and advisors to manage risk and optimize returns,” Wadekar said. “One cannot afford to stay away from this space, whether you’re an investor, advisor, or AMC,” he added.
Large AMCs looking to do the balancing act
Basu noted that larger and more established asset management companies (AMCs) are expected to drive both active and passive strategies simultaneously.
“Going forward, we expect the larger and older fund houses to balance both active and passive approaches, given that alpha still exists in the Indian market,” he said adding that newer and smaller AMCs might focus more on passive funds, with larger players likely to maintain a dual strategy.
On preferences for index funds over ETFs, Basu explained, “ETFs are largely institution-driven, and there’s no room for retrocession, which means no brokerage. Distributors prefer index funds because they allow for better portfolio management and monitoring for investors. Fund houses are gravitating toward index funds because they offer a more holistic approach to portfolio management, making them a preferred choice for distributors.”
Dutta further added that index funds could continue to gain interest from fund houses. “We’re seeing an increasing number of fund houses moving toward passive strategies, especially index funds. ETFs are growing too, but index funds are where the larger numbers are. It’s clear that for fund houses on the passive side, index funds are becoming a preferred tool for allocators and distributors because of their simplicity and ease of management. At Bandhan AMC, we chose to focus primarily on index funds because they fit better into the overall portfolio strategy for long-term investors,” he said.
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