Passive funds are slowly gaining investors’ confidence with most of the actively managed equity funds struggling even to beat their respective benchmarks.
Fresh money mobilised by passive funds totalled ₹10,758 crore in October against ₹5,215 crore mopped up by actively managed equity funds. The same trend prevailed in September with passive funds garnering ₹11,620 crore while it was ₹8,677 crore for actively managed equity funds.
In fact, the inflows into passive funds have been peaking with a slew of new fund launches. Passive funds mop-up through new fund offers have jumped 66 per cent in last seven months of this fiscal to ₹8,578 crore against ₹5,167 crore logged in the preceding seven months (March-September).
Despite the relentless bull market, the growth of assets under management of equity schemes has lagged passive funds’.
The assets of passive funds increased 37 per cent in October to ₹4.49 lakh crore from ₹3.28 lakh crore logged in April while that of equity funds was up by 31 per cent at ₹12.96 lakh crore (₹9.91 lakh crore in April) in the same period. Fund managers are finding it difficult to beat the benchmarks ever since SEBI introduced ‘categorisation and rationalisation of mutual fund schemes’ in 2017 which mandates fund houses to invest minimum 65 per cent as per the scheme nomenclature.
Fund of Funds
Besides Index and Exchange Traded Funds, investors have taken fancy to investing in global markets through Fund of Funds (FOF). The new fund offer of HDFC Developed World Indexes Fund of Funds and Mahindra Manulife Asia Pacific REITs FOF collectively managed to raise ₹1,148 crore last month.
Unlike equity fund NFOs, the promotional spend and distributors commission on passive fund NFOs are much less. The expense ratio of index funds range between 0.1 and 0.15 per cent, while that of other ETFs is typically less than one per cent. The expense ratio of actively managed equity funds starts from 2.25 per cent and reduces progressively to 1.05 per cent as the assets under management increase.
Passive fund investors still prefer to invest in lump sum during the NFO period rather than starting an SIP or make regular investment for reason better known to them, said Sunil Deshmukh, a Mumbai-based mutual fund distributor.
However, the mindset is slowly changing as the lower expense ratio of passive fund provides much-needed alpha for investors, he added.