The total assets under management (AUM) of passive mutual funds is nearing ₹7-lakh crore as a growing number of investors are turning towards passive investing amid the volatility in markets and the constant underperformance of actively managed funds.

The total AUM of passive funds grew 34 per cent to ₹6.97-lakh crore as of March 2023 as against ₹5.21-lakh crore in March 2022, show data by the Association of Mutual Funds in India (AMFI). In contrast, the overall MF industry recorded a modest 5 per cent y-o-y growth in AUMs in FY23 at ₹39.42-lakh crore (₹37.56-lakh crore).

Passive investing refers to an investment style where an MF scheme creates a portfolio by simply mirroring a benchmark index. These mutual funds contain a basket of stocks similar to that of the indices they track. Passive funds include exchange traded funds (ETFs), index funds, gold ETFs and international ETFs.

Rising index

Among the passive funds, index funds’ AUM witnessed the highest y-o-y growth of 144 per cent to ₹1.67-lakh crore as of March 2023. Other ETFs’ AUM grew 18 per cent to ₹4.84-lakh crore. Assets of gold ETFs also grew 18 per cent to ₹22,737 crore while AUM of fund of funds investing overseas (international ETFs) grew 2 per cent to ₹22,991 crore.

While passive investing is popular in the US, the concept has been gaining traction in India only in the last few years. Experts attribute the growth to increasing awareness and the growing need for diversification. The underperformance of actively-managed equity funds have also induced investors to look for alternate investment avenues.

‘Better outcome’

According to a recent report by Samco Securities-Nielsen, more than two-third investors in the stock market are unable to match the returns of the benchmark index while 65 per cent of the market participants were not even aware of their exact stock market returns.

Jimeet Modi, founder and CEO of Samco, said individual stock market participants must run their trading accounts in a manner where they must consistently outperform the benchmark indices. “Alternatively, they should probably stop active trading, as they are likely to have much better financial outcomes by simply investing in an index fund or outsource to a professional fund manager,” he added.