Passive investing is gaining more currency among Indian retail investors and high net worth individuals (HNIs) as they increasingly look for simple, transparent and low-cost investment options. This is reflected in index funds and exchange traded funds (ETFs) witnessing a significant jump in retail and HNI assets over the last two fiscals.

According to AMFI data, the asset under management (AUM) of HNIs in index funds have jumped 176 per cent to ₹8,267 crore as of March 2021 while index fund AUM of retail investors grew 157 per cent.

Likewise, the AUM of HNIs in equity and debt ETFs went up by 82 per cent to ₹13,704 crore at the end of FY21 while retail investors’ AUM under the category marginally dropped to ₹3,860 crore (₹4,054 crore).

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Why the surge?

Unlike active funds, which require a dedicated fund manager for stock selection and portfolio management, passive funds mirror an underlying index. The fund management fee is, therefore, extremely low in these funds. Investors have also been drawn to index funds and ETFs in recent times due to the underperformance of active large-cap funds when compared to their benchmarks.

Pratik Oswal, MD & CEO, Passive Funds Business, Motilal Oswal AMC, said that growing awareness about passive funds over the last two years, cost-consciousness of retail investors and performance of index fund and ETFs are the three major reasons for the growth in passive investing.

“Definitely there has been a pickup in ETFs. We run the largest debt ETF (Bharat Bond ETF) in the country, and we have seen a substantial pick up in our own assets,” says Radhika Gupta, CEO at Edelweiss Asset Management Company.

“More people like the simplicity of Bharat Bonds and other debt ETFs and index funds. There is a pickup in both equity and fixed income ETFs. I think investors feel that these products offer transparency, liquidity and come at a low-cost at a time when rates are also going down,” she added.

“This is not just in India but a worldwide trend. Passive investing is growing leaps and bounds and within passive investing philosophy ETFs are at the forefront,” independent market analyst Ajay Bodke said, adding, “Passive investments have done as good as active investments or even better in some cases over a longer period when you look at the returns net off fee.”

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