Mutual funds take the passive route in search for differentiation

Passive space set for innovative offerings as MFs look to leverage higher flexibility

The passive mutual fund (MF) space is seeing a spurt in action as fund houses are opting for the index fund route to launch differentiated offerings.

After Mirae Asset MF and Tata MF, Motilal Oswal MF is gearing up to launch a set of 'industry first' index funds.

The fund house has sought the Securities and Exchange Board of India's (Sebi) approval for four index funds, which will track the sectoral mid- and smallcap Nifty indices like the MidSmall Financial Services Index, MidSmall Healthcare Index, Nifty MidSmall IT and Telecom Index and MidSmall India Consumption Index.

Mirae Asset MF launched the Nifty Smallcap 250 Momentum Quality 100 ETF in February and filed papers for the Nifty MidSmallcap400 Momentum Quality 100 ETF later in the same month.

These schemes, if launched, will be the first in the industry.

On Monday, Tata MF announced six new fund offerings (NFOs), of which three index funds — Nifty 500 Multicap India Manufacturing 50:30:20 Index Fund, Nifty 500 Multicap 50:30:20 Infrastructure Index Fund and Nifty MidSmall Healthcare Index Fund — were the first in the industry.

The innovation in the passive equity space has gained pace as most large and medium-sized MFs have completed their active product suite. In the active equity space, fund houses have the option to launch multiple offerings in the thematic category. However, MF executives say that the possibilities are higher in the passive space.

"In passives, you can launch several differentiated products. The funds can be based on any theme or a sector, market-cap or even a factor like momentum, quality and growth. The idea is to capture possible opportunities that can make sense for investors," said Anand Varadarajan, Head -- Institutional clients, Banking, Alternate investments and Product strategy, Tata AMC.

The launches and proposals show that MFs are looking to differentiate by combining factors and sectors. There are now nearly 130 index funds. However, the top 10 schemes account for over 64 per cent of the total assets with index funds. The top 10 schemes, of which 9 are plain vanilla index funds tracking the Nifty50, Sensex, Nifty Next50 and S&P 500, manage Rs 67,400 crore out of the total Rs 1 trillion.