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The global trend of passive funds gaining traction over actively managed funds is fast catching up in India, too, with fund managers failing to deliver on their USP (unique selling proposition) of alpha generation.
Passively managed funds, including index funds, gold exchange traded funds, other ETFs and Fund of Funds investing overseas, registered a strong inflow of ₹68,678 crore in the financial year ended March, 2021 against an outflow of ₹21,004 crore logged by the actively managed equity funds.
The AUM (assets under management) of ETF increased 72 per cent to ₹3.22-lakh crore (₹1.86-lakh crore) in the last financial year.
In the same period, the AUM of actively managed equity funds was up 42 per cent at ₹9.79-lakh crore (₹6.60-lakh crore). The AUM of gold ETF surged 54 per cent to ₹14,123 crore (₹9,198 crore) while that of other ETFs increased 68 per cent to ₹2.75-lakh crore (₹1.64-lakh crore). Index fund AUM was up 92 per cent at ₹19,164 crore (₹9,952 crore) and Overseas Fund of Fund assets almost tripled to ₹12,408 crore (₹3,282 crore).
In a big disappointment to investors, most equity mutual fund schemes underperformed their benchmark indices in the last one year despite the markets hitting new highs.
For instance, 93 per cent of the large-cap funds underperformed their benchmark index while 82 per cent of the small- and multi-cap funds performed below their benchmarks. Other category of equity funds also failed to beat their respective benchmarks.
Alpha generation
Swarup Mohanty, CEO, Mirae Asset Global Investments (India), said that it will become increasingly difficult for fund managers to deliver the kind of alpha they were generating a few months back. “A fund managers’ ability on the alpha generation will further be tested by SEBI’s new norm on categorisation and rationalisation of mutual fund schemes,” he added.
In line with the popular trend, mutual funds have launched a slew of ETFs despite the profitability on managing passive funds being much lower compared to active funds. Passive funds charge an expense ratio of just 0.5-0.8 per cent while actively managed funds charge fees of about 2 to 2.50 per cent.
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