A recent study revealed that passive funds have gained traction among investors in India in the last few years, capturing a market share of over 17 per cent of Assets Under Management (AUM) in 2023 from 1.4 per cent in 2015. A passive fund is an investment instrument that simulates the performance of a market index or a specific market segment. Passive index funds, Exchange Traded Funds (ETFs), and Fund of Funds investing in ETFs are examples of these funds.
Low-cost nature of passive funds is biggest attraction
According to the study by Motilal Oswal Asset Management Company, 61 per cent of investors who participated in the study have invested in at least one passive fund and 53 per cent of respondents increased their allocation to passive funds in the last 12 months. The low-cost nature of passive funds has been cited as the biggest reason by investors for opting for such funds, followed by the simplicity of these funds and market returns. The study was conducted among more than 2,000 investors participating from across the country.
"At the end of FY-2018, the AUM of all passive funds put together stood at around Rs 83,000 crore. It has grown to more than Rs 7 lakh crore as of Mar-2023, rising 8.5 times in just 5 years at a compound annual growth rate (CAGR) of 54 per cent," the study mentioned.
Around 90% of respondents investing via Index Funds
Investors seem to have a preference between Index Funds and ETFs with 87 per cent of respondents investing via Index Funds as compared to 41 per cent investing through ETFs. Also, more than 75 per cent of respondents said that they preferred to invest regularly every month using systematic investment plans (SIPs), while only 42 per cent said that they leaned towards lumpsum investment.
When it comes to investor preferences in terms of allocation, the study revealed that nearly half of those investing in passive funds allocate 10-30 per cent of their portfolio to passive funds. About 15 per cent of respondents mentioned that they have allocated 31-50 per cent in passive funds, while 12 per cent of respondents allocated more than 50 per cent of their portfolio in passive funds On the other hand, 28 per cent of investors participating in the study have a less than 10 per cent allocation to passive funds.
According to the fund house, this is because ETFs are bought and sold on the stock exchanges and require the investor to have a demat account. On the other hand, investing in Index Funds has no such requirement and is comparatively straightforward similar to any other mutual fund transaction.
Investment landscape in India
The investment landscape in India is evolving rapidly, with more than 80 per cent of respondents saying that they were planning to hold their investments for more than 3 years, while 16% planned to hold for 1-3 years. Only 3 per cent of investors said that they were looking to liquidate their investments in less than a year.
Interestingly, the study found that 60 per cent of respondents get information on markets and investments from social media platforms like Twitter and Instagram.
On the other hand, only around 26 per cent of respondents follow traditional media outlets for information related to investing. In its annual report released on Monday, capital markets regulator Sebi said that it is engaged with the mutual fund industry to introduce ‘MF Lite’ regulations for passive funds in a bid to reduce the compliance burden and foster innovation.
(With PTI inputs)