Despite the market regulator SEBI banning new fund offers (NFOs) in June quarter, passive funds are fast gaining currency among investors with mutual funds mopping up ₹3,910 crore from 70 NFOs in the last eight months.

The assets under management of passive funds (on index funds, exchange traded funds, other ETFs and fund of funds investing overseas) have increased to ₹6.67-lakh crore last month from ₹5.28-lakh crore in April. Net inflows in passive funds have tapered to ₹10,394 crore last month against ₹15,888 crore in April in line with the overall sluggish market trend.

Incidentally, equity inflows have plummeted to ₹2,258 crore from ₹15,890 crore in the same period.

Kaustubh Belapurkar, Director, Morningstar India, said there is certainly increasing investors’ interest for passive funds as the overall alpha generated by active funds has reduced and the number of funds that beat the benchmark have reduced.

Many investors who are looking to make equity investments are investing in passive funds as they are unsure which active fund to choose, he added.

“A majority of the recent index fund launches have been on fixed income funds – Target Maturity Funds, which allows investors to take fixed income exposure with a certain maturity date in mind, thus reducing the interest rate risk if one stays invested till maturity,” he said.

Higher yields

While index-based debt investments are getting popular, there were also new offers on ETFs on equity indices and silver. Debt passives have become more popular in recent times on the back of rising bond yields.

Over the last eight months, interest rates have gone up sharply since RBI initiated its rate hike cycle. Similarly, yields on longer dated Government securities and AAA-rated bonds have risen by 80 to 100 bps during this period. Yields in the mid- to long-duration (5 to 10 years) segment appear to be attractive. Considering this, AMCs have been launching target maturity funds which invest in various liquid debt instruments including Government securities, State Development Loans and Corporate bonds with specific maturities.

Anup Bansal, Chief Business Officer, Scripbox, said in view of the volatile ride in the market, investing in index funds as a part of a passive strategy is expected to gain market share. However, it will take quite some time for passive funds to gain significant market share, he added.