The year 2021 was a good year for mutual funds in terms of flows as the buoyant stock markets kept attracting a large number of new investors to the capital markets with many opting for the mutual fund route to invest in stocks.
The total assets under management (AUM) of the Indian mutual fund industry rose from Rs 31.03 lakh crore as on December 31, 2020, to Rs 38.5 lakh crore as on November 30, 2021, according to data from the Association of Mutual Funds in India (AMFI).
Further, the month of November also saw the monthly flow through systematic investment plan (SIP) touch a record Rs 11,004.94 crore – the first time ever that such monthly contribution breached the Rs 11 crore mark. Further, the number of SIP accounts stood at an all-time high of 4.78 crore in November 2021.
One trend, however, that was the hallmark of the mutual fund industry in 2021 was the rise of passive funds. Never before in the history of the Indian mutual fund industry, there was so much focus on passive schemes with both the new-age and the traditional old mutual fund houses launching passive schemes.
Simply put, passive funds are those that replicate a particular index or a benchmark. An index fund or an exchange-traded fund (ETF) is the most popular example of a passive fund.
For example, a Nifty Index fund of any mutual fund house would have the same 50 stocks in its portfolio that are part of the benchmark Nifty index of the National Stock Exchange (NSE).
Similarly, any Sensex fund would have 30 stocks in its portfolio. Even the weightage of the stocks would mirror those in the index against which the scheme or the fund is benchmarked.
The current year has already seen the launch of over 70 passive fund schemes, as per data from Value Research, a mutual fund tracking firm. This is more than double that of last year when a total of 31 such schemes were launched.
The growing popularity of such schemes is further corroborated by the fact that a mere 11 passive funds were launched by Indian mutual funds in 2016.
In terms of AUM, the mutual fund industry has seen the share of passive funds surge to 11 per cent of the total AUM in the quarter ended September 30, 2021 – a sharp rise from the 7 per cent share as on March 31, 2020.
In terms of folios as well, the growing share is quite visible with nearly 10 per cent of the total folios belonging to passive funds as on September 30, 2021. This share was pegged at a meagre 3.3 per cent as on March 31, 2020, as per AMFI data.
A recent report by Finity, a fintech specialising in passive and direct mutual fund schemes, estimates the AUM of passive funds to cross Rs 25 lakh crore by March 2025 from Rs 3 lakh crore in March 2021.
In other words, it estimates that the share of passive AUM in the overall assets of the Indian mutual fund industry will surge from 10 per cent as of March 2021 to 37 per cent in March 2025.
Meanwhile, a report by Boston Consulting Group on the global asset mix of mutual funds showed that the AUM of passive funds was pegged at $22 trillion in 2020, which is expected to rise to $34 trillion in 2025.
Passive products recorded their highest growth in the pandemic-affected year as the AUM rose 17% globally, as per the report.
Going ahead, industry participants believe that passive funds will cement their place further as an increasing number of young and new-age investors are looking at low-cost funds to invest their money.
In terms of costs, passive funds typically are cheaper compared to the active funds as the expense ratio – fund management, marketing and other overhead expenses of a scheme – are lower.
The strong outlook is further proved by the fact that fund houses are looking to launch a large number of ETFs and Fund of Funds – which invest in other mutual fund schemes – in the near future.
Data from the Securities and Exchange Board of India (SEBI) shows that mutual funds have filed draft documents for nearly 30 passive schemes in the last three months.