Let us start with a quiz comprising two questions. Firstly, which is the category of mutual funds in India that has the highest AUM. People may be tempted to believe that it would be liquid funds, since most of the corporate money goes there. The correct answer is Index ETFs. It is rather surprising that the highest AUM of nearly Rs5 trillion belongs to the passive category of index ETFs. Now for the second question. Which are the two largest asset managers in the world. The answer is Blackrock and Vanguard at first and second place. Between them, they manage $18 trillion (about 5 times the size of India’s annual GDP). Once again, both are predominantly index-based passive funds.
What is this attraction about passive funds in India?
As the name suggests, passive funds include index funds and index ETFs (exchange traded funds). The difference between index funds and index ETFs is that index ETFs are closed ended funds that are listed on the stock exchange and can be bought and sold like any other security using your trading account and stored in the demat account. Passive fund managers do not worry about stock selection. They just select a good index and benchmark their index portfolio to it. The only thing that passive fund managers worry about is to ensure that the tracking error is kept under control so that the portfolio of the fund reflects the underlying index as closely possible.
In its recent press release, NSE celebrated the rapid growth of index ETFs in India in the last 4-5 years, especially after the COVID pandemic. But now, for the million dollar question; why has passive investing taken off in such a big way in India too (we will look at real industry data later). Broadly, there are 5 reasons for this phenomenal growth in passive investing in India in recent years.
Intuitively, we know that there is supply of passive assets coming in and that is being met with enhanced demand. Having seen the reasons; is this growth for real and how have the AUM and the folios of passive assets growth in the last 4 years?
How passive fund AUM has grown in last 4 years?
The table below captures the growth in assets under management (AUM) for passive funds over the last 4 years, along with CAGR growth.
Fund |
Feb-23 AUM |
Feb-22 AUM |
Feb-21 AUM |
Feb-20 AUM |
CAGR |
Index Funds |
1,33,772 |
54,737 |
16,867 |
7,930 |
156.46% |
International Fund of funds |
22,138 |
22,072 |
10,716 |
2,724 |
101.05% |
GOLD ETF |
21,836 |
18,728 |
14,102 |
7,926 |
40.19% |
Index ETFs |
4,87,067 |
3,91,436 |
2,73,886 |
1,80,707 |
39.17% |
Grand Total |
6,64,814 |
4,86,974 |
3,15,571 |
1,99,288 |
49.42% |
Data Source: AMFI
Growth in AUM has not just sharp in the last couple of years, but the CAGR growth of passive fund AUM between 2019 and 2023 has been an impressive 49.4%. Index Funds have led the way with 156.5% AUM on account of the slew of debt and equity index funds launched by private AMCs and the government. While the international FOFs have also seen sharp growth, it is on a much lower base.
However, it is good that the AUM has been growing consistently over the last 4 years. Index ETFs have been really impressive since they account for bulk of the AUM of the passive category. Despite such a high base, the AUM of Index ETFs has grown at a CAGR of 39.2% in the last 4 years. Index ETFs are not just driving the AUM but also the retail and institutional interest in passive funds.
How passive fund Folios have grown in last 4 years?
The table below captures the growth of Folios (investor accounts) for passive funds over the last 4 years with the CAGR growth.
Fund |
Feb-23 |
Feb-22 |
Feb-21 |
Feb-20 |
CAGR |
GOLD ETF |
46,73,999 |
37,74,398 |
10,89,710 |
4,92,753 |
111.68% |
Global FOF |
12,57,035 |
12,44,247 |
6,23,281 |
1,74,580 |
93.10% |
Index Funds |
33,89,328 |
23,42,493 |
9,36,077 |
4,76,834 |
92.27% |
Index ETFs |
1,18,54,687 |
97,85,826 |
39,42,779 |
17,66,536 |
88.62% |
Grand Total |
2,11,75,049 |
1,71,46,964 |
65,91,847 |
29,10,703 |
93.77% |
Data Source: AMFI
What stands out in the above table is that the CAGR growth in folios has been stronger than the CAGR growth in AUM. That is a good sign since it shows that retail investors are getting interested in passive products. Growth in AUM has not just sharp in the last 1 or 2 years, but the CAGR growth of passive fund folios between 2019 and 2023 has been an impressive 93.8%. Interestingly, it was Gold ETFs that led the way with 111.7% growth in folios as most retail investors appear to have taken a small exposure to gold as a hedge.
Among others, Global Fund of Funds, Index Funds, and Index ETFs have all grown at a CAGR of around 90% in last 4 years. That is a substantial accretion to the folio count. Index ETFs constitute the bulk of the folios also in passive funds but other categories are catching up showing genuine retail demand building up. Folios are not just driving retail participation but also the AUM with a promise to grow exponentially once the tipping point is reached.
For a long time, passive investing never picked up in India since active funds were consistently beating the markets. That has changed as markets get tougher to beat. As Jack Bogle of Vanguard put it succinctly; “Why spend time looking for a needle in the haystack, when you can buy the entire haystack”. That message appears to be rubbing off on Indian investors and that is for the better.
Related Tags
Invest wise with Expert advice
IIFL Customer Care Number
(Gold/NCD/NBFC/Insurance/NPS)
1860-267-3000 / 7039-050-000
IIFL Capital Services Support WhatsApp Number
+91 9892691696
IIFL Capital Services Limited - Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213,IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
ARN NO : 47791 (AMFI Registered Mutual Fund Distributor)
This Certificate Demonstrates That IIFL As An Organization Has Defined And Put In Place Best-Practice Information Security Processes.