Passive fund flows steal a march on actives in H2FY21

Domestic mutual fund investors showed an increased preference for passive funds — schemes that track a benchmark index or a basket of securities or a commodity. In the past six months, passive funds have seen net inflows of ~27,083 crore.

In March, such schemes reported their fifth consecutive month of inflows. Actively managed funds, on the other hand, have seen an exodus. Though they reported net inflows of ~9,115 crore in March, they recorded net outflows of ~36,395 crore over the past six months.

Industry participants feel passive funds are at an inflection point and could dominate the MF industry over the next few years.

The passive product category includes index funds, equity exchange-traded funds (ETFS), gold ETFS, and fund of funds investing in foreign markets.

“We are excited about equity funds witnessing net inflows of ~9,000 crore in March, but I am equally thrilled about passive funds witnessing net inflows of around ~8,200 crore. We have seen a fair amount of maturity in the way investors are buying financial assets,” said Swarup Mohanty, chief executive officer of Mirae Asset Management.

Industry officials say one major reason for the shift towards passive funds could be the fact that several large-cap funds have not generated alpha.

“It is a reality that the number of benchmarks beating funds is narrowing, and in such a scenario there will certainly be a shift towards passive funds,” added Mohanty.

To be sure, flows into passive categories have been underpinned by new fund offers (NFOS) in both equity and debt segments.

Typically, passive funds investments attract lower expense ratios than active ones, in which investment decisions are made at the discretion of the fund manager.

The S&P Indices Versus Active (SPIVA) India scorecard for the period ending December 2020 revealed that 81 per cent of Indian equity large-cap funds and 65 per cent of equity-linked savings scheme (ELSS) funds have underperformed their respective indices. A majority of the schemes in the large-, mid- and small-cap funds and ELSS have underperformed their respective benchmarks over one-year, three-year, and five-year periods.

The rush for passive funds is also because of the increase in demat accounts over the past year. Since ETFS are traded on the stock exchanges, one needs to have a demat account.

“Many first-time investors are investing in passive funds as they now have demat accounts, which was not the case earlier. We believe that the passive market is set to grow from here on,” said a senior official at a leading fund house.