Passive funds offer 'compelling solution' for wealth creation: Motilal Oswal's Pratik Oswal

Unlike in the US, where fund methodologies can vary widely, Indian investors can be assured that "what you are paying for is what you are getting," Oswal said.

As passive investing continues to gain momentum in India, experts see opportunities emerging for investors. As a part of a panel to discuss the growth of passive funds, Pratik Oswal, Head- Passive Funds, Motilal Oswal AMC noted that he believes that passive funds offer a compelling solution for investors seeking a simple approach to wealth creation.

Breaking down how an investor should decide whether passive is right for him or her, Oswal suggested that an investor should do is really find out their needs. “If they're looking for a simpler solution, a passive fund can do really well in their portfolio," Oswal said during Motilal Oswal’s Passive Fund Conclave. He added that index funds and exchange-traded funds (ETFs) allow investors to "invest and forget" for decades without worrying about performance fluctuations.

A significant shift in the Indian investment landscape has been the narrowing performance gap between active and passive funds. "Unlike the past, where there was a significant deviation in performance, now both categories are delivering similar returns. You're not only avoiding underperformance but also gaining a huge amount of simplicity in your portfolio," Oswal noted.

The evolution of passives in India

Talking about the growth of passives in India versus the US, Ashutosh Singh, MD&CEO, Asia Index noted that passive investing has evolved differently in India versus global markets. "While the US saw its first passive fund launch in 1976 with Vanguard, India’s passive story is still in its early stages," he said. However, he pointed to two key inflection points that propelled passive investments in the country: the introduction of EPFO flows into ETFs in 2014 and the surge in passive product offerings around 2019.

"We've seen an explosion in passives over the last 5-6 years, supported by digital investment platforms and a shift in investor preferences," he said. While India's passive AUM has grown significantly, Singh noted that India is still far from the maturity of US markets, where passive investments account for nearly 70% of the market and have expanded to other offerings like crypto.

On recent concerns about the rapid proliferation of passive funds, Oswal noted, "In the US, there are more ETFs than stocks. No one knows if India will follow suit, but the key difference is that Indian regulations are much tighter.” Unlike in the US, where fund methodologies can vary widely, Indian investors can be assured that "what you are paying for is what you are getting," he said.

Prateek Sinha, Director, DeepWealth added that high-net-worth investors and family offices are adopting a "barbell approach" to investing. "They are using ETFs and index funds for the public market portion of their portfolios while taking on more risk through private equity, venture capital, and startup investments," Sinha explained. This strategy helps investors lower costs on the public side while seeking higher returns from private markets.

Sinha also pointed out that retail investors are gradually moving towards passive funds but still face hurdles. "There is a lack of awareness. People might invest in a Nifty 50 or banking index fund, but broader adoption remains slow," he added.