The Hindu Business Line : No active following for passively managed funds

IF you are an investor in mutual funds in India, chances are you have not invested in index funds at all. Instead, you would have applied your mind solely to diversified equity funds, ones that aim at outperforming their benchmarks and not mirror them as index funds try to do.

Witness the low, piteously low, asset base that most of these funds have had since their inception. And, going by the kind of interest displayed by large sections of the market, it is clear that the concept of exchange-traded funds (ETFs) has made little progress in India.

As the figures so correctly reveal, passively-managed index funds/ETFs have been a strict no-no for most investors in this country.

The reasons are not too far to seek: The market focuses almost entirely on actively-managed products, distributors try hard to sell them to clients and popular media analyse them at every opportunity. The result - index products are simply relegated to the backwaters.

Well, for the record, these funds do have a following. Among them is Mr Sanjiv Shah, who, as ED of Benchmark MF, is quite vocal about the whole situation.

"What we are faced with is rather sad... It shows how the average investor here is willing to put large bets only on the so-called growth funds. The fact that he concentrates overtly on these options makes it a very one-sided affair," he quipped.

Hopefully, others will start agreeing with him before long.

For the uninitiated, an ETF offers units that trade intra-day on stock exchanges at prices determined by the market. Investors may buy or sell the units through just as they would deal in the shares of any publicly traded company.

Just consider the ETFs that are in existence in certain other markets, especially the US, and you will know the difference between them and us.

The combined assets of ETFs in the US stood at $238 billion in May, figures collated by the Investment Company Institute (ICI) indicate. Assets of all ETFs rose by $17.37 billion (7.9 per cent) that month.

There were 111 ETFs tracking domestic stock indices, while 46 tracked international equity indices. Half a dozen schemes tracked bond indices.

Those who stick to actively-managed schemes have a completely different - and powerful - logic to back their case. They argue that `normal' diversified equity funds have managed to beat indices many times in the past, and that they may well do so in future.

The fund managers concerned seek to do their stock-selection well, outdo the broad market and fetch returns that are superior to what the indices can provide. The argument, you will agree, is quite convincing, given the performance delivered by a number of funds in recent times.

On another front, a number of offer documents for tax-saving funds have been sent to SEBI for clearance. Both Deutsche MF and HSBC MF have joined the ELSS bandwagon.

Incidentally, the tax-savers too have been somewhat unwanted in this country, with investors largely shying away from the concept of a three-year lock-in.

As a result, they do not have much to show in terms of assets under management. The newly-introduced Section 80C of the I-T Act is expected to change this, at least to some extent.

Feedback may be sent to nilanjan@thehindu.co.in

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