Rise of Passive Investment
The landscape of the mutual fund industry in India is going to see a significant change in the next few years. The asset under management (AUM) of passively managed funds is going to rise exponentially. It is currently less than 5 per cent of the total AUM and is likely to reach double digits. The catalyst for this rise will be the lower ratio of mutual fund AUM to GDP and technological advancement with a digital approach that will make passive funds easier to proliferate. Currently, India’s mutual fund AUM to GDP ratio is a mere 15 per cent against the global average of 75 per cent.
This is despite the domestic mutual fund AUM growing by more than 20 per cent annually over the last five years. Even the equity AUM to market capitalisation stood at just 5 per cent compared to the global average of 30 per cent. This shows the huge opportunity for growth in the Indian mutual fund industry. This has enticed many new players. Recently, the industry saw the entrance of three new players. Out of these three, two have acquired older fund houses and one received in-principle approval from the market regulator to launch a mutual fund house.
Going by their intention and recent activity they are likely to focus on passively managed funds or index funds. For example, Navi Mutual Fund, started by Flipkart founder Sachin Bansal has filed draft offer documents for 11 passivelymanaged schemes that it plans to roll out, including one that would invest in one of US-based Vanguard’s exchange-traded funds (ETFs). Similarly, Zerodha, India’s largest discount brokers, has also expressed interest in launching passive funds.
Even some of the existing fund houses are keen on shifting their focus towards passive funds. In the last five years the AUM of passively managed funds has increased at a compounded annual growth rate (CAGR) of 67 per cent or 13 times. The reason for such a rise lies in the AUM of passively managed funds posting a better performance than the index funds due to lower expense ratio. This is especially true for large-cap-based funds. Therefore, we may see a rise in the AUM of the domestic mutual fund industry on the back of a rise in passively managed funds.
SHASHIKANT