Passive funds gain massive traction as active fund managers struggle to beat benchmark

Suresh P. Iyengar | | Updated on: Jun 11, 2022

Inflows into passive funds more than doubled to ₹72,900 crore in last 5 months

Passive funds are fast gaining ground with investors as more than half of the actively managed equity funds failed to beat their respective benchmark indices amid unprecedented volatility in the market.

Despite the gloomy economic outlook amid high inflation and heavy selling by foreign portfolio investors, equity markets have been holding fort with steady inflow into mutual fund schemes. This has also raised concerns over high valuation. Market regulator SEBI has recently made changes in passive fund regulation to make them more attractive for investors and enhance liquidity in ETFs.

The mop-up by passive funds in the last five months more than doubled to ₹72,903 crore against ₹34,475 crore logged in the same period last year.

In May, it was up 31 per cent to ₹12,229 crore against ₹9,332 crore recorded in same period last year. Fresh flows into these funds crossed the ₹10,000-mark in February and has remained above that level consistently ever since.

The assets under management of passive funds have increased 49 per cent to ₹5.28 lakh crore last month against ₹3.55 lakh crore registered in the same period last year.

Index funds lead table

Index funds have topped the table by attracting investment of ₹5,723 crore last month against ₹1,241 crore in May, 2021 as investors ploughed money into these funds whenever the indices fell sharply.

About 124 ‘other ETF’ category, which includes benchmark and sectoral-based indices, attracted investment worth ₹6,056 crore (₹5,380 crore).

However, inflows into fund of funds investing overseas remained lacklustre as AMFI had frozen individual mutual fund overseas investment cap in February. Mutual funds investment in global markets inched closer to the $7 billion limit laid down by RBI and Sebi.

Inflows into overseas funds

Inflows in overseas funds plunged to ₹246 crore last month against ₹2,424 crore registered last year even as their AUM increased to ₹20,412 crore (₹16,143 crore). Investment in gold ETFs almost stagnated at ₹203 crore (₹288 crore) on concerns of rising bank interest rate taking the sheen off the yellow metal.

Kavita Krishnan, Senior Analyst, Morningstar India, said passively managed funds have gained prominence among investors in recent times and they have been actively adding these funds in their portfolio as part of diversification.

Interestingly, gold ETFs folios have nearly tripled to 45 lakh in May against 16 lakh last May and in last two months it added 2.33 lakh folios on safe haven appeal, she said.

However, Abhinav Angirish, Founder, cautioned that while passive funds can outsmart traditional investments such as fixed deposit, they should not form the crux of the investor’s portfolio as they cannot match active returns in long term.

Investors who are just getting started with mutual funds should allocate more to passive funds, while those with a moderate to high risk appetite should allocate 5-10 per cent to these funds, he said.

Published on June 11, 2022
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