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Alpha an uphill struggle, mutual funds file for passive, factor funds

Alpha an uphill struggle, mutual funds file for passive, factor funds

02 Sep 2021

Investors can soon choose from a wider bouquet of passive and factor funds as several fund houses including Navi Mutual Fund, Kotak MF and Mirae Asset have filed for dozens of such funds with the regulator in the last couple of months.

Passive funds are those that mostly follow any market index by investing in the same stocks in the same weightage, unlike active funds where portfolio managers constantly try to outperform benchmark indices. Such funds are expected to gain popularity in an environment where it is becoming difficult to generate alpha or excess return from investment in comparison to a benchmark index, experts said.

“Markets are becoming more and more efficient because of which information edge — especially in the large-cap stocks — is diminishing and, as a result, active funds in the large-cap and flexi-cap space are finding it difficult to outperform the benchmark,” said Kunal Valia, head-quant, smart beta and indexing, at Waterfield Advisors.

Fund houses are also looking to increase their product basket.

Sachin Bansal-backed Navi Mutual Fund has filed for 10 passive funds, Axis MF has filed for five index funds, Kotak MF has filed for four exchange-traded funds (ETFs) and two factor fund of funds, Mirae has filed for a manufacturing ETF, Nippon has filed for a Nifty Auto ETF, and Edelweiss for a large and midcap fund plus an MSCI India Domestic Financials & Global Fintech 50 Index Fund.

Many of these schemes are unique offerings in the mutual fund space, while some help a fund house fulfil its product basket.

“With Sebi restricting one fund in a category, fund houses have little choice but to launch passive funds,” CEO of a domestic fund house told ET.

In the US, assets under management (AUM) of passive and active equity managers are almost similar whereas, in India, passive funds and ETF AUM at ₹3.36 lakh crore is a small portion of the total equity AUM of about ₹17 lakh crore. Out of the passive AUM, a bulk comes from the Employees’ Provident Fund Organisation (EPFO).

Valia of Waterfield Advisors said the under-penetration of index funds and ETFs in India is playing catch up and, going forward, it will be a multi-year trend.

Financial planners recommend passive funds for their low cost, simplicity and no fund manager bias. Many financial planners believe first-time investors could start their equity journey with a simple vanilla index fund based on the Nifty 50 or Nifty Next 50 stocks.

Passive funds Navi MF has filed for include Navi Total US Stock Market Fund of Fund, Navi Nifty 100 ESG Index Fund, and Navi Nifty Commodities Index Fund.

Analysts at ICICI Securities estimate the Indian MF AUM to grow at 15% CAGR between 2021 and 2030 to touch ₹100 lakh crore. There is immense growth potential as the mutual fund AUM as a percentage of India’s GDP currently stands at just 12% per cent against the global average of 63%.

Alpha an Uphill Struggle, MFs Lay Out Passive, Factor Menu