Passive funds may hit 30% of equity AUM in 5 years: Anil Ghelani, DSP MF
India’s mutual fund landscape is steadily evolving, with passive investing emerging as a key trend. While active funds continue to dominate overall assets under management (AUM), passive funds — comprising ETFs and index funds — now account for around 21% of equity AUM. According to Anil Ghelani, Head of Passive Investments and Product at DSP Mutual Fund, this share could grow to 30% over the next five years as more investors embrace the simplicity, transparency and cost-effectiveness of passive strategies.
In this interview, Ghelani shares his views on the rising popularity of passive funds, the role of SIPs during market highs, the decline in flows to sectoral ETFs, and the scope for innovation despite low-cost competition. He also talks about DSP’s product strategy across asset classes and explains how investors should approach global investing under current regulatory constraints. Excerpts of the interview:
Q. Passive investing is gaining traction in India, with a jump of around 25% in AUM from previous year. But active funds still dominate AUM. How do you see passive funds rise in equity mutual fund space?
Ans: Yes in the past year, rather the past decade, we have seen passive investing picking up steam in India. While globally in the US we have already seen passive funds taking over in size and dominating AUM exceeding 50% of total Mutual Fund industry, in India we are gradually seeing the growth.
‘Passive investing in India gaining ground, could touch 30% of equity AUM in 5 years’
From the total Mutual Fund industry AUM, today ETFs and Index Funds are about 17%. Since you asked about Equity, we are currently at about 21% of total equity AUM, which in my view, could grow to 30% in the next 5 years. In India we have a huge scope of growth for the Mutual Fund industry, both in terms of AUM as well as number of people investing.
This is where passive funds can assist in a big way to increase penetration to new investors who have yet to start their investing journey. This is because they have relatively lower cost and more simple so it can give investors a very clear understanding about their risk and return outcomes. Investors are increasingly drawn to the simplicity and efficiency of passive strategies, fuelled by growing awareness.
The future looks bright for passive funds, poised to become a cornerstone of the equity mutual fund space, empowering investors with cost-effective, reliable wealth-building options.
Q. With markets recovering after recent hiccups and valuations seem to be stretching in some pockets, are passive investors at risk of entering at the peak? How should SIP investors approach this phase?
Ans: I strongly believe that market levels should not deter you as a disciplined SIP investor. SIPs and passive funds are a natural fit. Investing systematically helps us navigate volatility and assists with investing discipline, while passive funds keep costs low and eliminate selection bias.
Warren Buffett’s mentor Benjamin Graham, in his epic book “The Intelligent Investor” had popularized a simple strategy of “Dollar Cost Averaging” which suggests a formula investing of a set amount in the same investment at fixed intervals over time! So even if valuations may seem to be stretching in some pockets, SIPs by design try to mitigate timing risk through cost averaging. Investors should remain focused on asset allocation and long-term goals rather than reacting to short-term market levels.
Q. Thematic and sectoral ETFs have seen a massive drop in flows recently. Why are these funds falling out of investor favour?
Ans: Flows into thematic and sectoral ETFs tend to spike during specific market narratives or performance cycles. The recent decline may reflect some profit booking or rotation into more diversified exposures. These products are more suited for tactical allocation and require timing and conviction. Investors are possibly turning cautious amid market uncertainty and preferring simpler, broader products with predictable performance profiles.
Q. Expense ratios for passive funds are low, especially in the ETF space. How do you see this price war affecting product innovation and long-term investor value?
Ans: The relatively low expense ratio has been revolutionizing wealth creation. In my view, a healthy price war can benefit investors while fostering innovation. For the fund houses, it is a long term business which would be driven by higher volumes and lower cost, by leveraging on technology and efficiency.
‘Fund houses continuously innovating with exciting new products’
With a view to see growing AUM, fund houses are continuously innovating with exciting new products like smart beta and thematic funds, which have the potential to enhance portfolio diversification. For long-term investors, such low-cost funds ensure greater value retention, supported by strong market fundamentals, creating a vibrant, investor-friendly passive landscape.
Q. DSP recently launched or revamped several passive offerings. What kind of investor or goal are you targeting with these products—are they meant for core allocation or tactical plays?
Ans: Yes we at DSP Mutual Fund have passive investment products across all asset classes – Equity, Debt, Commodities, as well as the entire market range of large, mid and small. We offer a wide range of products of index funds, ETFs and rules based smart beta products.
With this focus, we are targeting all investors – so whether you are a hard working salaried individual like me, or a HNI or NRI, whether you are a SME business owner or a large public corporation – we will try to provide some relevant ETF or Index Fund which you can use. It can be for a long term core allocation or a short term tactical play or even shorter term temporary parking of surplus cash in liquid ETFs.
Q. Debt ETFs and passive debt funds are still underpenetrated compared to equity. Do you see retail investors seriously considering fixed-income passive products going ahead?
Ans: Debt oriented ETFs and Index Funds have been a bit slow in terms of growth as compared to Equity and Commodities. Many retail investors reduced interest in debt mutual funds, both active as well as passive, after the tax changes which took away the benefits of long term capital gains tax.
However, there are still many other advantages such as transparency of portfolio and clarity about the portfolio YTM which in turn gives a good expectation about returns and risks. So while the demand may be show, I feel that gradually fixed income passive funds, especially Target Maturity Debt Funds would gradually see growth.
Q. What’s your view on international passive investing, especially after SEBI’s new rules and recurring limits on overseas funds? Should investors look beyond India right now or wait and watch?
Ans: An ETF is simply a wrapper of some underlying securities. Hence to be successful, you need to ensure that the underlying is LLT – Large, Liquid and Transparent. If any one of this is missing, then there could be issues while buying or selling which could cause the investor to suffer.
With the current issues around overseas limits, many overseas ETFs are trading at very wide spreads from their fair value. Hence I feel that if investors want to look beyond India, currently a better approach would be to invest via LRS route directly outside India or via some LRS Fund vehicle in the GIFT City under the IFSCA.