Moneycontrol Pro Panorama | Rising passive investment

Increasing passive funds tracking India augurs well for higher investments, particularly from nations with a substantial equity investment culture.

Dear Reader, 

Indian markets are gradually attracting the attention of global investors. While domestic investments have shown resilience since the pandemic, foreign investors influence short-term market trends.

The extent of Foreign Institutional Investor (FII) involvement in India depends upon the performance of their markets and interest rates. Foreign investors tend to withdraw funds from emerging markets when interest rates are high. Conversely, investors channel funds into emerging markets in a risk-off scenario with falling interest rates and buoyant equity markets.

The pattern of FII investments in India has been anything but consistent. The fiscal year 2020-21 peaked as FIIs infused Rs 2,74,031.96 crore post-pandemic, capitalising on excess funds released through quantitative easing. However, the subsequent two years witnessed withdrawals amounting to Rs 1,40,009 crore in 2021-22 and Rs 37,631 crore in 2022-23, coinciding with a rise in interest rates. As interest rates reach their zenith and the Indian economy gains traction while China experiences a slowdown, FIIs have injected Rs 1,87,920 crore into India in the current fiscal year, 2023-24.

A significant portion of the investments flowing into the country emanates from passive funds. Asset management companies prefer the cost-effective index fund route over maintaining a comprehensive asset management team for investment oversight. Consequently, increasing passive funds tracking India augurs well for higher investments, particularly from nations with a substantial equity investment culture.

In a recent communication, the National Stock Exchange (NSE) reported the launch of seven passive funds tracking Nifty indices in Japan and South Korea. Six funds follow the Nifty50 index, while one focuses on a Nifty50 2x leverage index. The exchange anticipates an incremental inflow of $550 million into the country through this channel.

Presently, 21 passive funds track Nifty indices outside India. Notable Asset Management Companies (AMCs) tracking the Indian index include iShares Blackrock, DWS, First Trust, Nomura AMC, and Mirae Asset Global Investments. Additionally, some funds track alternative indices, such as the MSCI index.

The popularity of passive funds extends beyond foreign investors, finding favour among domestic investors as well. In India, 270 passive funds are tracking various Nifty indices. The total Assets Under Management (AUM) of passive funds in India and abroad have surged to approximately $70 billion as of November 2023, compared to $1 billion in November 2013, reflecting an impressive annualised growth rate of 53 percent.

Recognising the role of passive funds in attracting foreign capital, the Securities and Exchange Board of India (SEBI) has taken steps to ease regulations. This includes reducing the capital requirement for passive-only fund houses to Rs 10 crore from the current Rs 50 crore and prescribing liberal disclosure rules for such fund houses.

As the Indian economy, companies and markets continue to outperform, the more will its attraction for foreign investors increase and the more funds will track Indian indices.

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