A recent study has uncovered the growing popularity of passive funds among investors in India. In 2023, passive funds accounted for over 17% of Assets Under Management (AUM), a significant increase from 1.4% in 2015. Passive funds simulate the performance of a market index or segment, with examples including passive index funds, Exchange Traded Funds (ETFs), and Fund of Funds investing in ETFs.
Low-Cost Nature of Passive Funds as the Main Attraction
A study conducted by Motilal Oswal Asset Management Company revealed that 61% of participants have invested in at least one passive fund, and 53% of respondents increased their allocation to passive funds in the past year. Investors find the low-cost nature of passive funds to be the primary reason for choosing them, followed by their simplicity and market returns. The study included over 2,000 investors from across the country.
“At the end of FY-2018, the AUM of all passive funds put together stood at around Rs 83,000 crore. By March 2023, it had grown to more than Rs 7 lakh crore, an increase of 8.5 times in just five years, with a compound annual growth rate (CAGR) of 54%,” stated the study.
About 90% of Respondents Invest in Index Funds
Investors show a preference for Index Funds and ETFs, with 87% investing through Index Funds and 41% investing through ETFs. Additionally, over 75% of respondents prefer systematic investment plans (SIPs) for regular monthly investments, while only 42% lean towards lump sum investments.
When it comes to allocation, approximately half of those investing in passive funds allocate 10-30% of their portfolio to passive funds. Around 15% allocate 31-50%, and 12% allocate more than 50%. On the other hand, 28% of participants have less than a 10% allocation to passive funds.
The study explains that ETFs require investors to have a demat account and are bought and sold on stock exchanges. In contrast, investing in Index Funds has no such requirement and is as straightforward as any other mutual fund transaction.
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The Changing Investment Landscape in India
The investment landscape in India is rapidly evolving. Over 80% of respondents plan to hold their investments for more than three years, while 16% plan to hold for 1-3 years. Only 3% of investors aim to liquidate their investments in less than a year.
Interestingly, the study found that 60% of respondents gather information on markets and investments from social media platforms like Twitter and Instagram. On the other hand, only approximately 26% follow traditional media outlets for investment-related information. In its annual report, capital markets regulator SEBI stated that it is collaborating with the mutual fund industry to introduce “MF Lite” regulations for passive funds, aiming to reduce compliance burden and foster innovation.
(With PTI inputs)
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Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.
