Whalesbook
Passive Funds See Surge in Retail Investment Pace
Indian retail investors are increasingly embracing passive mutual funds, investing their money faster than other investor categories. Data from the Association of Mutual Funds of India (Amfi) indicates that while passive fund assets have more than doubled in three years to ₹12.99 trillion, retail investors' collective share stands at just 7.1%, up from 4.01% in September 2022.
The Incentive Gap for Distributors
The primary reason behind retail investors' smaller share in passive fund assets, despite their faster investment pace, lies in the incentives offered to distributors and brokers. These intermediaries earn substantially higher commissions from selling active mutual fund schemes compared to passive ones. This structural bias means that passive products, which offer lower costs to investors, receive less promotional push from the sales channels that dominate investor acquisition.
Vishal Jain, chief executive officer of Zerodha Fund House, explained that the global trend of distributors preferring to promote active funds over passive options like ETFs persists in India. This lack of significant intermediary support means that passive investing's growth is largely organic, driven by investors independently recognizing the limitations of active fund performance and the cost efficiencies of passive strategies.
Financial Implications
Data from Amfi shows a remarkable growth trajectory for passive mutual funds. Since September 2022, the assets under management (AUM) for passive funds have surged 2.3 times, reaching ₹12.99 trillion as of September. During this period, retail investors' contribution grew from 4.01% to 7.1% of this total. In contrast, High Net-worth Individuals (HNIs) saw their share increase from 11% to 17%.
Together, the EPFO and corporates still account for the largest portion of passive AUM, holding 73% of the total, down from 84% three years prior. However, in absolute terms, retail investors have demonstrated the most rapid expansion in passive assets, growing 4.9 times. HNI passive assets grew 4.3 times, while corporate passive assets saw a 2.2 times increase, underscoring the high-growth, albeit low-base, nature of retail participation.
Expert Analysis and Investor Behavior
The rapid growth in retail passive assets is attributed to a low base, but the increasing number of retail folios in passive funds is a significant indicator of growing awareness. Akhil Chaturvedi, executive director and chief business officer at Motilal Oswal AMC, noted the 32% growth in passive fund folios over the year ending September, outpacing the 29% growth in active equity mutual fund folios.
Jimmy Patel, managing director at Quantum Mutual Fund, elaborated on the behavior of HNIs. As individuals accumulate wealth, their risk appetite often shifts. HNIs and family offices, having access to other high-return ventures like unlisted AIFs and angel investing, tend to reserve their highest risk-taking for these avenues. Consequently, they often use mutual funds for more stable, passive exposure, leading to their higher share in passive fund AUM. This behavior reflects a mature wealth management strategy, prioritizing risk diversification.
Historical Context and Performance
Over the past three years, the total number of passive funds, including ETFs and index funds, has more than doubled, rising to 626 as of September from 307 a year prior. These funds are designed to mirror the performance of a specific market index, such as the Nifty 50 or Sensex. While their performance is closely aligned with the index, minor discrepancies can occur due to tracking errors.
In contrast, a significant portion of active mutual funds has failed to outperform their benchmarks over extended periods. An S&P Global report indicated that as of June, approximately 75% of active large-cap mutual fund schemes underperformed their benchmarks over the last decade. The situation is even more pronounced in the small- and mid-cap categories, where around 80% of active schemes have lagged behind their respective benchmarks. This persistent underperformance by active funds further bolsters the case for passive investing.
Future Outlook
With increasing investor maturity, greater awareness of low-cost investment options, and the continuous introduction of innovative passive products, the share of non-institutional investors in passive funds is expected to grow further. While distributor incentives remain a hurdle, the inherent benefits of passive investing—low costs and consistent benchmark-tracking performance—are likely to continue attracting a growing number of informed retail investors.
Impact Rating
8/10
This news directly impacts Indian retail investors by shedding light on investment trends, the effectiveness of different fund types, and the economics of financial advice. It helps investors make informed decisions about their asset allocation and understand the landscape of mutual fund products available.