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Index fund folios soar as active schemes lag

Index fund folios soar as active schemes lag

15 Sep 2021

Mumbai: Folios in index funds saw more than a fourfold jump to 1.53 million in August this year from 345,000 in March 2020, according to data from the Association of Mutual Funds in India (AMFI). Assets under management surged more than five times during this period, to Rs 28,093 crore from Rs 5,815 crore.

Financial planners said investors turned to index funds mainly because of the inability of active fund managers to outperform the benchmark indices, especially in the large-cap category. Many first-time investors also chose passive funds due to their low cost, ease of understanding and no fund manager bias.

As per data from SPIVA India, over longer horizons, the majority of actively managed large-cap equity funds in India underperformed the large-cap benchmark, with 68.42% of large-cap funds underperforming over the 10 years ending December 2020.

“Investors believe if you cannot generate alpha in the large-cap space it is better to reduce the cost. Hence a subset of investors using large-cap funds are moving to index funds,” said Dev Ashish, founder, Stableinvestor.com, a Sebi registered investment advisor.

Though a bulk of the money comes in schemes that replicate indices such as Nifty 50, S&P, BSE Sensex, Nifty and Next 50, increasingly investors are also allocating to mid-cap and small-cap index funds and thematic funds.

Given the increasing investor interest, a new fund house, Navi AMC, recently launched the cheapest Nifty 50 fund at 6 basis points expense ratio and also filed 10 index funds for regulatory approval. These include the Navi Total US Stock Market Fund of Fund, Navi Nifty 100 ESG Index Fund and Navi Nifty Commodities Index Fund.

Another asset management company, Edelweiss, has filed for a large and mid-cap fund, plus an MSCI India Domestic Financials and Global Fintech 50 Index Fund.

New-age digital platforms which offer direct plans only are also spurring the growth of index funds. “For a direct platform there is no incentive to sell an active fund,” said Vijay Kuppa, founder, Orowealth.

Distributors selling mutual funds sell regular plans where commissions are inbuilt. In index funds, the commission is much lower than an active fund.

Many new DIY (do it yourself) investors are coming into mutual funds through fintech platforms or fund house websites, as this was the easiest way during the pandemic when offices were closed. Such platforms sell index funds as they are easy to understand and no tracking is needed, unlike in the case of active funds.

“We see incremental folios in passive funds are coming from new-age fintech platforms,” said Pratik Oswal, head (passive funds), Motilal Oswal AMC.