Passive fund race: Bigger players steal the show over smaller counterparts

Over 95% passive AUM is with top 10 AMCs; experts say opportunities still exist in the smart beta space

Majority of smaller fund houses have stayed clear of passive funds even as their larger peers are engaged in a pitched battle for dominance in the passive space. Of the 43 fund houses, 18 are yet to come out with an equity passive fund including some mid-sized asset management companies (AMCs) like Canara Robeco and Parag Parikh Financial Advisory Services (PPFAS).

There are a couple of reasons behind this. One, smaller AMCs are still focused on completing their bouquet of active offerings and two, they do not see how they can make their products stand out.

"We don't see a differentiator for us in the passive space. If there are already multiple Nifty50 or Nifty Next50 funds out there, what's the point in coming out with the same offering. In active, you can be different from others even though the fund category is the same," said G Pradeepkumar, chief executive officer of Union AMC.

Passive funds, which come in two variants — index funds and exchange traded funds (ETFs) — are simple MF products which mimic their benchmark. Like a Nifty50 index fund or ETF has the same stocks and weightages as in Nifty50. As a result, every Nifty50 index fund, be it from AMC A or AMC B, are exactly the same. Given that all major AMCs already have these products in the market, the rest of the companies see no point in coming out with another exact offering.

The top 10 AMCs have a near complete dominance in the passive space. Together, they have a passive AUM of Rs 4.2 trillion, which is 96 per cent of the total money in index funds and ETFs at Rs 4.4 trillion. Even if we ignore the institutional holdings (which mostly belongs to the Employees Provident Fund Organisation or EPFO) in SBI and UTI MFs' Nifty50 and Sensex ETFs, ICICI Prudential MF's Bharat 22 ETF and Nippon India's CPSE ETF, the top 10 AMCs' share in the passive AUM still comes in at 85 per cent.

While smaller AMCs are staying away, mid-sized AMCs (beyond the top ten AMCs) have struggled to garner inflows in their passive funds. For example, of the 35 Nifty50 index funds and ETFs in the market, only 9 have assets under management (AUM) in excess of Rs 1,000 crore and these schemes belong to six major AMCs — SBI, UTI, Nippon India, HDFC, ICICI Prudential and Kotak.

"When the products are exactly the same, customers tend to go for the bigger brand. Distributors too prefer to recommend products from top fund houses as it is easier to convince investors," said Co-founder and Chief Investment Strategist of JRL Money Vijai Mantri.

Navi Mutual Fund, a new entrant in the MF industry, is the only small-sized AMC with some presence in the passive space. It has managed to do so by differentiating itself on the cost front. The AMC was the first to launch passive funds with an expense ratio as low as 0.06 per cent. As of November 21, the AMC's Nifty 50 index fund had an AUM of Rs 571 crore, which is the 14th highest among the 35 index funds and ETFs based on Nifty 50.

There is also space for differentiation if one looks beyond the plain vanilla passive funds. The more complex space in passive investing, known as 'smart beta' and 'factor investing', allows fund houses to come up with innovative products. Another new entrant NJ India has taken this route to make a mark in the passive space.

"It all depends on what your strength is. In future, fund houses will be known for their expertise in either active or passive investing. However, every fund house would want to have both the types of schemes as it is required to properly service their customers," said Anupam Guha, head – Private Wealth, ICICI Securities.