As the number of takers for passive investing increases in the Indian mutual fund industry, the segment is witnessing some interesting trends. Though exchange-traded funds (ETF) emerged as preferred vehicles for passive investing in the USA, Indian investors are rather comfortable investing through index funds than ETFs.
According to a survey done by Motilal Oswal Asset Management Company (MOAMC), 87 percent of the respondents invest through index funds, while 42 percent of the respondents invest through ETFs.
MOAMC conducted the survey online during February-May 2023 and involved more than 2,000 investors across fund houses spread across the country. Around 56percent of the respondents were in the age group of 18-35 years, whereas 54 percent live in metro cities. Sixty-one percent of the respondents reported their annual income to be less than Rs 10 lakh.
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Around 61 percent of the respondents said that they invested in at least one passive fund. Low cost, simplicity and market returns were cited as reasons for choosing passive products. Over half of the respondents (53 percent) said they increased their allocation to passive funds in the last 12 months.
In India, there is no specific preferential tax treatment for investing in units of ETFs over units of mutual funds (including index funds).
Many investors do not have demat accounts and while transacting in units of ETF, the investors may suffer from poor liquidity as well as high impact cost. Index funds do not suffer from these issues and also allow systematic investment plans (SIP) for investors, who want to invest in a staggered manner.
In March 2023, monthly SIP inflows crossed the Rs 14,000 crore mark for the first time, staying above the Rs 10,000 crore mark for 19 months in a row. In June 2023, the contribution of SIP to inflows stood at Rs 14,734 crore, according to AMFI data.
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The survey mentioned that three out of four respondents, prefer to invest through SIPs. The survey further highlighted that more than 80 percent of the respondents plan to hold their investments for more than three years.
Pratik Oswal, Head of Passive Funds, MOAMC said, “Passive funds are widely popular in the US and have over 50 percent market share. We have started seeing similar trends in India over the last few years as well. With a market share of around 17 percent, we believe that there is ample runway for passive funds ahead. This survey provides insights into how investors think about passive funds. It also helps shed some light on the thought process behind investment decisions of Indian investors.”
The mutual fund industry has seen an increased demand for passive funds over the last five years. The assets under management (AUM) of all passive funds put together stood at Rs 7 lakh crore as on March 31, 2023, compared to Rs 83,000 crore five years ago, registering a compounded annual growth rate of 54 percent.
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The index funds have been around in the Indian markets for more than two decades. However, there were not many takers for them. Employees Provident Fund Organisation (EPFO) started investing in stocks through units of ETFs tracking mainstream indices such as Nifty 50, in FY2015-2016.
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