Passive funds pick up further steam in November 2023

11 Dec 2023 , 07:11 AM

How big are passive funds in India?

Passive funds have taken off in a big way in India in last few years as active funds struggled to beat the index. How big are passive funds in the Indian context? Here are some pointers that will clarify where passive funds stand in India in the context of overall mutual funds.

• Indian mutual funds have a total assets under management (AUM) of Rs49.05 trillion, of which the AUM of passive funds account for Rs8.23 trillion. In short, passive funds account for about 16.78% pf the total MF AUM.

   

• In term of folios, the mutual funds overall have a total of 16.19 crore folios (unique investor accounts) of which 2.51 crore investor folios belong to passive funds, which is nearly 15.49% of the overall folios of the mutual funds segment in India.

   

• The total number of passive mutual fund schemes in India are 435, which is nearly 29.55% of the total of 1,472 schemes available in India. That means the AUM per scheme is much lower in the case of passive funds than in the case of active funds.

   

• For the month of November 2023, the net inflows into passive funds were Rs2,234 crore, which is just about 8.72% of the total net inflows into mutual funds in November at Rs25,616 crore. 

   

• However, as a share of gross purchases, the passive funds were just about 1.49% of the gross purchases for November 2023; while the total redemptions in passive funds were about 1.28% of the total redemptions of overall mutual funds in the month.

The story of passive funds in November 2023 suggests that they may be growing in terms of overall mutual fund AUM and folios, but in terms of gross flows, they are still quite small. 

How passive funds have grown globally since 2013

Jack Bogle of Vanguard Funds, famously said, “Why look for a needle in a haystack, when you can buy the entire haystack.” That is passive investing. However, even Bogle did not envisage this rapid shift towards passive investing in last ten years. This table tells you how passive investing has burgeoned in global mutual funds in the last 10 years.

Calendar  Year	Passive AUM  ($ trillion)	Active AUM  ($ trillion)	Passive share (% of AUM)	Active share (% of AUM)	Passive Flows ($ billions)	Active Flows ($ billions)
2013	4.4	18.6	19%	81%	353	461
2014	5.2	19.5	21%	79%	520	528
2015	5.5	18.6	23%	77%	548	74
2016	6.5	19.5	25%	75%	609	(200)
2017	8.7	23.4	27%	73%	939	603
2018	5.6	21.2	29%	71%	692	(352)
2019	11.3	24.8	31%	69%	750	66
2020	13.5	27.6	33%	67%	690	(45)
2021	16.8	30.8	35%	65%	1,362	1,060
2022	14.5	24.2	37%	63%	746	(1,275)

Data Source: Morningstar

Even a cursory glance tells us that there is a big shift from active funds to passive funds in last 10 years. The trend got accentuated post pandemic; from 2019 onwards. These are global numbers and hence they are a lot more muted. If one looks at the US markets in particular, the shift from active to passive has been more acute with the share of passive funds already above 40% and poised the cross the AUM of active funds by 2028. For now, here are the key takeaways of how the power is shifting towards passive funds globally.

• In the last 10 years between 2013 and 2022, the AUM of active funds have grown from $18.6 trillion to $24.2 trillion. During this same period of 10 years, the AUM of passive funds has grown from $4.4 trillion to $14.5 trillion. In short, the active fund AUM over the last 10 years has grown by 30% overall while the AUM of passive funds has grown by 227% in the same period. Even if you consider the low base effect, this is phenomenal.

   

• How has the market share of active and passive funds changed. In the last 10 years, the share of passive funds has risen from 19% to 37% of total AUM while the share of active funds has fallen from 81% to 63%. In the US, the equation looks poised to touch 50:50 by the year 2028, although the global markets will take more time to reach that mark.

   

• Finally let us look at the flows into global active and passive funds in last 10 years. Passive funds saw positive net inflows in each of the last 10 years while active funds have seen net inflows in 6 year and net outflows in 4 years. If you consolidate the flows overall for last 10 years, passive funds got net cumulative inflows of $7,210 billion while active fund got net cumulative inflows of just about $920 billion in the same period. 

The moral of the story is that the shift towards passive funds is absolutely real and happening at a rapid pace. Although non-US markets have been slower to adopt to this shift, compared to US markets, the shift is for everyone to see. Here is the India story.

How passive fund folios grew in November over April 2023

One can look at the growth of passive fund in India either in terms of folios or AUM. Let us first look at growth in terms of folios. There are 13 categories of passive funds, but we have ignored the category of “Other domestic ETFs”, as it has zero folios. The table below captures actual folio numbers and the folio growth of the remaining list of 12 categories of passive funds where there are existing folios. It must be remembered that folios are investor accounts unique to an AMC, but not necessarily unique to an investor. Folio growth captures retail intensity better than AUM or flows. 

Passive Mutual Fund  Schemes (Folios)	Folios Nov-23  (in Numbers)	Folios Apr-23  (in Numbers)	Growth  (%)
Silver ETF	1,43,973	75,891	89.71%
Fund of funds investing overseas in Passive Funds	6,69,188	3,74,286	78.79%
Equity oriented Index Funds (Domestic Index Funds)	55,22,356	35,59,102	55.16%
Equity oriented ETFs (International ETFs)	3,38,153	3,21,986	5.02%
Equity oriented ETFs (Domestic ETFs)	1,02,87,068	98,45,185	4.49%
Income/Debt Oriented ETFs	19,49,996	18,67,689	4.41%
Gold ETF	48,91,187	47,12,199	3.80%
Equity oriented Index Funds (International Index Funds)	2,36,359	2,38,189	-0.77%
Income/Debt Oriented Index Funds (Other than TMIF)	15,444	15,613	-1.08%
Other Index Funds	54,653	57,565	-5.06%
Income/Debt Oriented Index Funds (TMIF)	1,40,310	1,49,954	-6.43%
Fund of funds investing overseas in Active Funds	8,17,075	9,41,061	-13.18%
Total Folios with growth	2,50,65,762	2,21,58,720	13.12%

Data Source: AMFI (TMIF is target maturity index funds)

The above table compares the folios at the end of November 2023 with the folios at the end of April 2023. This may be a rather short term picture, but that is the granular data that is available. It still gives a good ringside view of the passive fund growth in India in FY24.

• Overall, the folios of passive funds have grown 13.2% as of end November 2023, compared to 11.0% at the end of October 2023. That is a lot of investor intensity in last 6 months. The total folios of passive funds stand at close to 2.51 crore, which is 16.78% of overall folios. This figure was just 15.41% of total folios at the end of October 2023.

   

• The leader of the pack in terms of folio growth was silver ETFs, a recent addition, which saw folios growing by 89.71% in the last 6 months. That is fantastic growth in a span of just 6 months, but it comes on a low base and is a new diversification option for investors. A slew of silver ETF NFOs have also helped the folio numbers to grow.

   

• The other two categories of fund that saw good traction were Passive Overseas Fund of Funds (FOF) that has grown folios by 78.79% over April 2023 while equity oriented domestic index funds have also seen growth of 55.16% over April 2023.

   

• On the downside, the FOFs investing in active funds saw a sharp fall in folios by -13.18% while the income oriented TMIFs and the miscellaneous passive funds category also saw contraction of -6.43% and -5.06% respectively. Clearly, the move against discretionary investing is visible across.

As of November 2023, out of the 12 categories of passive funds with live folios, 7 categories saw accretion in folios over April 2023 while 5 funds saw contraction in folios for FY24.

How the passive funds AUM shift in November 2023

The table below captures the actual AUM of the 12 categories of passive funds with existing folios. Unlike folios, the assets under management (AUM) are a mix of fresh flows and accretion in value of the portfolio due to market appreciation. Most of the passive equity funds do gain from index accretion. The AUM may not be a good measure of retail intensity, unlike folios, but that is what the fees of fund managers depends on, and hence we also look at the AUM growth in November over April 2023 in the table below. 

Passive Mutual  Fund Schemes	AUM Nov-23  (₹ in crore)	AUM Apr-23  (₹ in crore)	Growth  (%)
Silver ETF	2,984.04	1,785.73	67.11%
Equity oriented Index Funds (Domestic Index Funds)	75,025.32	54,355.39	38.03%
Fund of funds investing overseas in Passive Funds	6,940.03	5,427.23	27.87%
Equity oriented ETFs (International ETFs)	9,416.87	7,975.68	18.07%
Gold ETF	26,995.73	22,949.98	17.63%
Equity oriented ETFs (Domestic ETFs)	4,79,360.67	4,08,915.17	17.23%
Equity oriented Index Funds (International Index Funds)	3,871.47	3,396.94	13.97%
Income/Debt Oriented ETFs	89,345.68	83,483.85	7.02%
Income/Debt Oriented Index Funds (Other than TMIF)	14,545.49	14,385.82	1.11%
Income/Debt Oriented Index Funds (TMIF)	94,522.38	95,319.83	-0.84%
Fund of funds investing overseas in Active Funds	16,478.10	17,211.62	-4.26%
Other Index Funds	3,448.21	3,635.52	-5.15%
Total AUM with growth	8,22,934.00	7,18,842.76	14.48%

Data Source: AMFI (TMIF is target maturity index funds)

What do we decipher from the table. We have compared AUM of various categories of passive funds as of November 2023 with relevant AUM as of April 2023. The share of passive funds in AUM is 16.78% and growing. Here are key takeaways from the November 2023 passive story.

• The AUM of these passive funds have grown by 14.18% in FY24 as of November 2023 compared to 9.16% at the close of October 2023. Much of the growth has come from equity index funds that benefited from the sharp rally in the macro indices in November 2023. The total AUM of passive funds stand at close to Rs8.23 trillion. Equity oriented domestic ETFs at Rs5.68 trillion, accounted for 68.98% of the AUM of all passive funds. Other significant contributors to the AUM of passive funds in September 2023 were debt oriented target maturity funds, debt oriented ETFs and domestic index funds. Apart from the low cost structure, equity oriented index fund also gained from the index rally.

   

• The leader of the pack in terms of AUM growth was, once again, silver ETFs, a recent addition, which saw AUMs growing by 67.11% over April 2023. That is fantastic growth in a span of just 6 months, but it comes on a low base. A slew of NFOs have also helped silver ETFs build folios and AUM, apart from the diversification potential.

   

• The other categories of passive funds that saw good traction in the last 6 months were domestic index funds at 38.03% growth, FOFs investing in overseas passive indices at 27.87%, International equity ETFs at 18.07% and surprisingly gold ETFs at 17.63%.

   

• On the downside, miscellaneous index funds saw AUM contraction of -5.15% while FOFs in active overseas funds saw AUM contract by -4.26%. Out of the 12 categories of passive funds, 9 categories saw AUM accretion while 3 saw AUM contraction.

The shift to passive is not just a US phenomenon or a Western investing story. Passive funds have come of age in India too and that is what the granular data is indicating.