Passive funds have not had a single net outflow month in the last year

Passive funds in India have not had a single net outflow month in the last twelve months and continue to attract positive flows, a testament to their growing demand and institutional support, as per the 'Baroda BNP Paribas Annual Outlook 2024' report.

Passive mutual funds are funds which replicate a market index like the Nifty or Sensex. These funds invest in the constituents of the selected market index in the same proportion as they are present in the index.In passive index funds, the weightage of all stocks is similar to that of the underlying index. If a stock's weight in the underlying index changes, the fund manager also buys or sells units to match the weightage of the index.

"As compared to active funds, these funds charge lower fees since they do not need to conduct in-depth research to select stocks. With these funds, you can opt for a cost-efficient way to diversify your portfolio and get exposure to a wide spectrum of market segments," explained Value Research.

Passive funds have taken the world by storm, gaining market share rapidly across countries, while in India its adoption and acceptance has picked up pace post the pandemic and with government and institutional support along with increased marketing efforts by various asset management companies.

Retail investors tend to skew towards index funds, which have been gaining market share steadily over the past four years. Equity assets under management are concentrated in market-weighted indices with 84 per cent of equity AUM in vanilla market-weighted indices (Market Cap indices).

In fact, globally passive equity funds' net assets surpassed those of their active counterparts for the first time in 2023 as investors increasingly sought lower-cost funds that mirror broad market indices. According to LSEG Lipper, global passive equity funds' net assets stood at a record $15.1 trillion at the end of December while those of active funds was $14.3 trillion. Active funds faced consistent outflows, a situation worsened by their higher management fees and underwhelming returns. According to Lipper data, last year saw active funds suffer outflows totalling $576 billion, in stark contrast to passive funds, which attracted inflows of $466 billion.

Passive Debt:

Debt has an even distribution amongst index funds and ETFs with 90% of AUM concentrated in Target Maturity Funds and the remainder in Constant Maturity Funds.

AUM in passive debt is predominantly present in government securities (State and Central Government) followed by corporate securities and liquid securities.

"Debt recorded the highest inflow in the Last Twelve Months (LTM) (Dec-22 to Nov-23) narrowly beating equities with commodities and international passives forming a small portion of the contribution. However, it is to be noted that Rs 30,840 crore (75%) of the total debt category flows in LTM came in the initial four months from December 2022 to March 2023. Taxation regime changed from April 23 onwards removing indexation benets from debt mutual funds resulting in flows virtually drying up for debt schemes," noted the report.

Amongst Domestic equity, market-weighted equity funds garnered the most flows followed by factor equity funds and sector equity funds. Thematic passive offerings saw net outflow in the last twelve months.

Debt had positive net flows across all categories in the last twelve months.

New Scheme Launches:

92 new schemes have been launched as of December 2023 with a total AUM of Rs 9,703 crore as of Dec 2023.

 

"The increased awareness and continuous engagement have ensured steady money flows to passive schemes. The Ministry of Labor has permitted all provident fund organizations (government and private) up to 15% of all incremental ows to be invested in equity ETFs and Index Funds (Gazette Notication HO/IMC/132/Pattern2015/12937) resulting in strong institutional support to ETFs with the Employee Provident Fund Organization (EPFO) leading the way and other private provident funds and insurance companies onboarding passive funds in their portfolios,..fund. Passive funds are here to stay and in the coming decade, as markets grow and mature, will form an increasing part of investor portfolios." said the report.