The ratio of active fund inflows to passive funds dropped to its lowest level in 18 months at 0.4 to one in August, compared with last one-year average of 1.13:1, data from Association of Mutual Funds in India (AMFI) show.
The ratio of active to passive fund inflows has been moderating from a peak of 1.67 in January 2022, particularly in the last three months. The cumulative three-month inflow in passive funds, that includes index funds and exchange traded funds (ETFs), stood at ₹42,278 crore as of August end, while active funds had net inflow of ₹30,515 crore during the same duration.
This is the first time since April 2021, the cumulative three-month rolling inflow of passive funds is higher than active funds.
A large part of this growth in index funds is coming from target maturity debt index funds, said Niranjan Awasthi, head (products), Edelweiss Mutual Fund.
These schemes have a defined maturity and passively invest in high-quality government bonds or PSU bonds of a similar maturity constituting the fund’s benchmark index. On maturity of the fund, investors are returned their investment proceeds. For funds maturing between 2026 and 2027, investors can earn pre-tax returns of close to 6.8-7% with the indexation benefits.
Financial planners said fixed income mutual fund investors are moving to target maturity funds as returns from their debt portfolio have been modest. In the past one year, many fixed income schemes – both short- and long-term categories – have returned 2-4% partly due to mark-to-market losses on account of a series of rate hikes by the central bank.
“Investors are liking target maturity index funds because they aim to provide visibility of returns, are simple to choose and don’t require one to predict which way interest rates will move,” said Awasthi.
The asset under management (AUM) of equity passive funds rose to ₹5.63 lakh crore in August 2022 at a rate of 56% annually in the past three years, while active equity funds’ AUM grew at 29% annually to ₹14.77 crore during the the period.