Investors betting big on passive funds; AUM up 8

Investors betting big on passive funds; AUM up 8.5x in five years

Passive funds have made great strides over the past few years, with the total assets under management (AUM) of such schemes having jumped 8.5x in the past five years.

According to a study by Motilal Oswal AMC, the AUM grew 54% on a compound annual growth rate (CAGR) basis — from Rs 83,000 crore at the end of FY18 to above Rs 7 trillion as of March 2023. The market share of such funds has risen from 1.4% of the MF AUM in 2015, to over 17% at present.

The survey by Motilal Oswal AMC, with over 2,000 investors participating, also showed an affinity towards index funds over ETFs. Investors seem to prefer index funds to ETFs, with 87% respondents investing via the former and just 41% via the latter. This is because ETFs are bought and sold on the stock exchanges and require a demat account, while index funds have no such requirement.

Low-cost structure, simplicity, and ability to deliver market returns are the major factors pulling investors towards passive schemes. In 2015, the AUM stood at just Rs 20,000 crore, registering a 38x jump since.

An interesting aspect of this growth is that passive schemes lead in the large-cap equity basket, accounting for more than 60% of the AUM, while in 2018 they accounted for just 38%, according to data by ACE MF and MO AMC. It adds that excluding EPFO investments, passive large-cap AUM grew from Rs 9,000 crore to Rs 88,000 crore from December 2018 to June 2023.

Data from Value Research shows that out of 100 passive schemes that have been in existence for at least one year, 80 have given returns of over 10%. Schemes that have been in existence for at least three years show more even better returns, ranging from 15-39%. Not just that, 45 of these schemes have delivered over 20%.

“Allocation to sector, and stock-picking is what matters in passive funds. Most of the investors in passive funds are institutional investors, and a large participation by them has driven the AUM jump as asset allocation is their primary objective,” said Alok Singh, CIO of Bank of India MF.

He added that besides EPFO, large trusts and other institutions also bet big on passive funds.

“However, that is not to say that retail investment is totally absent. But retail investors coming into passive also look for asset allocation targeting long-term returns, rather than an active fund generating alpha; which is also why large-caps score.”

While the BSE LargeCap has risen over 9% in the last one year, it has shown a staggering 72.4% return for the past three years.