Index investing takes total AUM of ETFs to Rs 1 Lakh Crore

The assets under management (AUM) of passively managed funds have crossed the ₹1 lakh crore mark. While most of the funds continue to come from the mandatory contribution to the Employee Provident Funds Organisation (EPFO), financial planners point out that an increasing number of HNIs and retail investors have started pouring money into index funds and ETFs as actively managed funds in the large-cap space have failed to outperform their benchmarks.

As per data from Accord Fintech, only 2 out of 32 large-cap funds could outperform their benchmark indices over the last one year. Given this, many financial planners have started recommending index funds or exchange traded funds as a substitute to large cap funds, and this shift is likely to accelerate in the coming days.

“Index funds in India have a good demonstrated track record. There is no style risk and the cost is low,” said Rohit Shah, founder, Getting You Rich. Shah recommends index funds as a substitute to large cap funds. He believes indexing makes financial life uncomplicated for investors and they no longer have to bother about fund style or a fund manager leaving.

Financial planners point out that the big push to passive investing has come after the SEBI norm on categorisation and rationalisation of mutual fund schemes. After this, large cap stocks are mandated to hold 80% of their portfolio in top 100 stocks by market capitalisation, prompting investors to look at passive funds.

“Large cap funds had exposure to mid and small cap stocks and such funds were compared with Nifty and they were able to generate alpha. After the SEBI categorisation, it is difficult for large cap funds to generate alpha, on a consistent basis, due to which investors are going to passive funds,” said the product head at a domestic asset manager.

Fund houses have also been steadily building their product bouquet in the passive space over the last couple of years. DSP has launched a Nifty Equal 50 fund, while the Aditya Birla fund house has launched a Nifty next 50 ETF. UTI has launched the UTI Nifty Next 50 Index Fund. SBI MF has launched a smart-beta ETF, a hybrid between traditional passive and active strategies.

Even among sectoral indices, investors can access themes such as consumption, infrastructure, private banks, or PSU banks through ETFs, giving them a wide choice in the passive space.

“Alphas are set to diminish. Add to that the overall cost-reduction stance of the regulator, making it natural for investors to start thinking of passive funds as an alternative,” said Swarup Mohanty, CEO, Mirae Asset Mutual Fund.

Mohanty does not see any major changes in the near term from the actual flow from retail investors into passive funds, but asset managers are expected to expand their passive funds business.

Gaining Weight

Fund name	Inception date	AUM (in Rs crore)
SBI-ETF Nifty 50	22 July, 2015	41,812
SBI-ETF Sensex	15 March, 2013	13,398
UTI-Nifty ETF	1 September, 2015	9,927
Bharat 22 ETF	1 November, 2017	5,191
Kotak Banking ETF	4 December, 2014	5,075