Passive funds have taken centre stage in India's mutual funds market in the past few years, increasing its market share over 17 per cent in 2023 from 1.4 per cent in 2015, according to a Motilal Oswal AMC survey released Tuesday. The survey conducted among 2,000 investors from around the country, showed that 61 per cent of investors have invested in at least 1 passive fund and 53 per cent of respondents raised their allocation to passive funds in the last year, underscoring the fast-growing adoption of passive funds in India.


The survey report titled Investors’ Survey on Passive Funds-2023 said, "Investors have started to realize the importance of mutual funds for long-term wealth creation, not just in the metro cities but also in many tier-2 and tier-3 cities. Within the overall mutual fund industry, passive funds have taken center-stage over the last few years, gaining market share from 1.4 per cent of AUM in 2015 to over 17 per cent today." 


What Is A Passive Fund? 


Passive funds track a market index like Nifty, Sensex, etc to deliver returns that are very close to the underlying benchmark. Passive funds keep the same portfolio of stocks and weights as the underlying index. They also offer low-cost investments due to minimal management fees. Common types in India include Index Funds, ETFs (Exchange-Traded Funds), Fund of Funds, and Smart Beta Funds. Among these, Index Funds and ETFs are most preferred by investors.

"Passive funds offer several benefits to investors – they are easy to understand, effective for wealth creation, and are economical in the sense that they have lower expenses," the Motilal Oswal AMC said in its report. 


As per the report, at the end of FY18, the AUM of all passive funds put together stood at around Rs 83,000 crore. It now stands at more than Rs 7,00,000 crore as of March 2023, rising 8.5 times in just 5 years at a staggering 54 per cent CAGR. 


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Preference For Index Funds Over ETFs


The survey showed that investors seem to have a preference for index funds and ETFs (exchange-traded funds) with 87 per cent of respondents investing via index funds versus just 41 per cent investing via ETFs.


According to the fund house, this is because ETFs are bought and sold on the stock exchanges and require the investor to have a demat account. On the other hand, investing in Index Funds has no such requirement and is comparatively straightforward similar to any other mutual fund transaction.


"Passive funds are widely popular in the US and have over 50 per cent market share. We have started seeing similar trends in India over the last few years as well," said Pratik Oswal, Head of Passive Funds, Motilal Oswal Asset Management Company.

 

More than 75 per cent of respondents said that they preferred to invest regularly every month using SIPs, while only 42 per cent said that they leaned towards Lumpsum investment. More than 80 per cent of respondents said that they plan to hold their investments for longer than 3 years.

According to the survey, over half of those who invest in passive funds allocate 10-30 per cent of their portfolio in terms of allocation. Around 15 per cent of investors indicated they had committed 31-50 per cent of their portfolio to passive funds, while 12 per cent said they had allocated more than 50 per cent of their portfolio to passive funds. In contrast, 28 per cent of investors have less than a 10 per cent commitment to passive funds.