This figure reflects an increase from the 51 passive funds introduced in 2023, according to data from Ace Equity MF.
This growth in passive investing, particularly through thematic and index-based schemes, reveals an evolving trend among investors.
Factors driving growth
Alekh Yadav, head of investment products at Sanctum Wealth, said that “a key reason for the growth of passive funds “The challenge for active funds is to outperform benchmarks, especially in the large-cap segment.”
This, coupled with the ease of understanding and lower cost structure of passive funds, has made them an attractive option for both retail and experienced investors.
Prashant Kumar, founder and CEO of Kredit.pe, noted that the performance of passive funds often reflects the state of the economy.
“In a growing economy like ours, passive funds tend to outperform many actively managed funds due to their broad exposure and low volatility,” he told CNBC-TV18.com.
Performance and profitability
While active funds historically promise to generate alpha, data shows that over the long term, passive funds typically outperform most active funds.
In this context, “alpha” refers to the excess return that an active fund aims to generate over a benchmark index.
As Kumar pointed out, “Over a 10-year horizon, passive funds outperform more than 90% of managed funds, making them a safe bet.” “long-term investment.”
This growing awareness among investors has fueled the rise of index and thematic funds.
New strategies in the passive space, such as factor-based funds, are also gaining momentum.
Feroze Azeez, Joint Managing Director, Anand Rathi Wealth Limited, said, “The inflow into factor-based investments has grown significantly, with AUM in this category increasing from ₹7,050 crore to ₹26,363 crore in just one year.”
However, he recommends being cautious with these new strategies, as they are still in the experimental phase and lack precedents.
To illustrate the differences in performance, the following table compares the returns of various active and passive funds over one, three and five years:
Schema name | Category | 1 year | 3 years | 5 years |
Large-cap funds | ||||
Nippon India Large Cap Fund (G) | Large cap fund | 37.88% | 24.22% | 22.93% |
Passive funds | ||||
Nippon India BeES Nifty 50 ETF | ETF (exchange-traded funds) | 29.05% | 15.92% | 19.03% |
Mid-cap funds | ||||
Motilal Oswal-Reg(G) Midcap Fund | Mid-cap fund | 69.51% | 38.4% | 33.87% |
Passive funds | ||||
Motilal Oswal Nifty Midcap 150-Reg(G) Index Fund | Index funds | 50.47% | 27.8% | |
Small Cap Funds | ||||
Bandhan Reg(G) Small Cap Fund | Small Cap Fund | 74.68% | 28.97% | |
Passive funds | ||||
Motilal Oswal Nifty Smallcap 250-Reg(G) Index Fund | Index funds | 55.82% | 27.34% |
(Source: Anand Rathi Wealth)
Role in diversified portfolios
Passive funds have found their place in diversified portfolios, particularly for retail investors who prefer a hands-off approach.
Yadav believes that passive funds “are well diversified across stocks and sectors, which reduces concentration risk.”
Similarly, Kumar said passive funds “are one of the best long-term bets for any investor as they offer assured, worry-free returns with lower management costs.”
Santosh Joseph, CEO and founder of Germinate Investor Services LLP, said passive funds are best suited for investors who do not require active management.
He noted that “active strategies, particularly in the small- and mid-cap space, can outperform indices, making active funds more attractive to certain investors.”
Liquidity in passive funds
Liquidity is another key consideration for investors.
Yadav explained that liquidity is generally not a concern for passive funds in India, except in the case of certain ETFs where exchange-traded volumes may be low.
For large investments, index funds may offer better liquidity than ETFs.
Joseph added that ETFs enjoy greater liquidity as they are available for purchase and sale on stock exchanges.
“The biggest advantage of investing in passive mutual funds is the well-defined and respected liquidity window,” he noted.
The road ahead
As the Indian market continues to mature, the debate between active and passive investing will evolve.
While passive funds are gaining popularity for their simplicity, cost-effectiveness and long-term performance, active funds still hold appeal for investors looking to outperform the market.
“We are not yet a mature market like the US, and there is immense potential for alpha generation in the next decade, which makes the active space more attractive,” Azeez said.
For now, passive investing is expected to continue to grow, driven by a combination of new offerings, changing investor preferences and increasing awareness of its benefits.
As Kumar says: “I foresee significant growth in passive investing as equity market penetration expands and more experienced investors recognise its potential.”
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