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Passive Investing Report 2021 - Here’s all you need to know

India is at an interesting juncture when passive investing is making strong inroads

October 31, 2021 / 03:23 PM IST

Globally, especially in developed markets like the US, there has been a marked shift in the investors’ preference towards passive investing. Greenhorns of a similar trend are visible in the Indian markets. While, customer account folios in Indian passive assets have more than doubled in the last financial year but it is still at a nascent stage when compared to US and other developed markets.

India is at an interesting juncture when passive investing is making strong inroads. Finity, being true to its aim of democratising wealth management for all Indians, has tried building awareness around passive investing by bringing out the Passive Investing Report 2021 and organizing a Passive Investing Conclave -the first in India.

Here are some highlights of the Report and the Conclave for your benefit.

Finity Passive Investing Report 2021

The ‘Finity Passive Investing Report 2021 - Driving the next wave of growth in Indian markets‘was developed to give investors a holistic view of the passive investing scene both in India and abroad along with the analysis of important trends shaping the industry and projections for the growth of passive investing.

The report gives an in-depth account of everything associated with passive investing- right from what is passive investing, differences between active and passive investing, pros and cons of both the investing strategies, how passive investing came to be and then analyzes the trends and the reasons behind the growth of passive assets in the world’s largest mutual fund market, the US. Passive assets have seen an absolute growth of 410% in the last decade from $2 trillion to $10.3 trillion as of Dec 2020.

It makes the report a must-read for anyone looking to know the basics of passive investing.

Moving on to the Indian passive investing space, the Passive Investing Report 2021 brings out major reasons for the growth in passive investing in India, which now takes a 10% share of the total mutual fund AUM.

Reasons for the growth of passive investing in India

Underperformance of active funds: Over the short and long term, a majority of the actively managed funds, especially in the large-caps, have underperformed their benchmarks.

Cost: In India, the average expense ratio of actively managed large-cap funds hovers between 1.5% to 2.5% whereas the same for passive funds is the range of 0.05% to 0.3% which brings in a huge cost advantage especially in the long term.

Regulatory and government practices: The Government and SEBI have taken multiple initiatives such as introducing direct mutual funds, incentives for penetration of mutual funds beyond the top 30 cities, re-categorisation of mutual funds, and introduction of Total Return Index as a benchmark that have helped the growth of mutual funds and passive assets. Other initiatives such as disinvestment through ETFs, allowing EPFO to invest in ETFs and the recent introduction of Silver ETFs, all support the growth of passive assets.

Drivers for the overall growth of the mutual fund industry

The growth in passive investing and the mutual fund industry go hand in hand. Some drivers for the growth of the mutual fund industry, as brought out by the report, are -

Low existing penetration: Less than 2% of Indians invest in mutual funds compared to 45% of households in the US that have a mutual fund investment which provides the mutual fund industry a huge potential to grow.

Prospects of healthy GDP growth: As India races to become a $5 trillion economy, the size and low reach of financial services give an ideal opportunity for further growth of mutual fund subscribers.

Digitization and mobile penetration: Fintech innovation and technology adoption have seen tremendous growth in recent years. This makes investing easier across the country. Mobile plans and cheap data plans have added to the adoption.

Increasing preference for mutual funds as an investment avenue: Initiatives like Mutual Fund Sahi hai have projected mutual funds as a safer investment option, so a growing number of individuals are preferring to invest through the mutual fund route rather than the traditional options like bank deposits.

Innovation in passive products: Fund houses have been constantly innovating and bringing in newer passive products like the Equal weight-based Index funds, ETFs based on international index investing, or based on various themes like consumption, infrastructure, ESG, etc which allow investors to build a core and satellite portfolio using passive products.

Projections for the future growth of passive investing in India

The report estimates that passive assets will cross Rs 25 trillion of AUM by 2025 from an AUM of `Rs 3 trillion in March 2021, which is a growth of more than 8X. In addition, it also estimates that passive assets will grow to make up 37% of the overall assets in the mutual fund industry by 2025 from the 10% as of March 2021.

The rise of passive investing is one of the simplest and yet among the most exciting trends that is happening in the Indian financial markets.

The Passive Conclave had the best minds from the financial services like Nithin Kamath, Kunal Shah, CEOs of leading mutual fund houses and many personal financial influencers among many others to discuss the trends in passive investing, the future of the mutual fund industry, the role of technology in taking the industry ahead.

Download your copy of the Passive Investing Report

Moneycontrol journalists were not involved in the creation of the article

first published: Oct 31, 2021 03:21 pm