If you could tell us about the growth of passive funds and the factors driving this growth?
Assets under management (AUM) in passive funds, including exchange traded funds (ETFs) and index funds, is ₹10.5 lakh crore and there are nearly 3.95 crore folios or investor accounts.
The passive AUM has grown at a rate of 50 per cent compounded, more than twice the growth rate of non-passive funds in the last five years. Even in the near term, the passive space continues to witness strong growth. It’s an efficient way to take market exposure, low cost and there’s a variety of funds to choose from.
Do you think it will become difficult for passive funds to outperform active funds in the near future give the increasing volatility we have seen of late?
Passive funds tend to be fully invested into the market, and do not take cash calls. Hence, in the near term when there is market correction, a particular strategy which is fully invested could underperform a fund which has taken cash positions. However, in the long term, staying invested pays off. Active calls are an additional layer of risk and return over and above the market risks. It could work both ways.
Are passive funds more suited to large cap investments?
Not really. Passive funds come in a variety of formats. There are market cap based funds which can be used to invest into different parts of the markets, like large cap, mid cap and small cap. There are sector-based passive funds like bank and IT funds. Thematic funds like infrastructure and manufacturing could be used to play out specific themes.
There are a range of strategy funds like quality, momentum and low volatility, which could offer unique risk-return profiles. Similarly, there are various fixed income funds. Gold and silver are also available. Investors could use passive funds for various purposes, both for strategic and tactical allocations.
What factors should be kept in mind while selecting passive funds?
Investors should know their investment objectives, time horizon and risk appetite before investing. Assessing passive funds requires almost similar efforts as active funds. Those looking requiring regular income, for instance, could consider fixed income funds rather than equity.
Will we see the emergence/growth of smart beta funds as a category in future?
Smart beta, or factor-based funds, are among the fastest growing passive categories. These funds are a variant of market cap based indices such as NSE 500 and Sensex and apply a combination of factors such as value, quality and momentum to achieve portfolios with unique risk-return profiles.
Investors have the choice of playing specific strategies through these funds. A momentum strategy, for example, could be appropriate if the markets are entering a bullish phase. While such funds help in diversification, their performance could be cyclical with periods of underperformance.
What are the focus areas for Nippon India MF in the passive space?
At Nippon India MF, we offer 48 products in the passive space, across equity, fixed income and commodities. Our focus has been to offer a range of products for strategic and tactical allocations.
Our recent launches included sector funds like banking, IT, realty and auto; smart beta funds like Momentum and Nifty 500 Equal Weight Index funds as well as Target Maturity Fixed Income funds.