How to get the bigger picture of passive fund growth in India?

17 Oct 2023 , 09:59 AM

Passive funds have been the big story in the last few years. However, the definition provided by AMFI has all along been too generic. Till the current year, the AMFI reporting used very generic classifications like index funds, fund of funds and other ETFs. However, each of these items were a combination of a number of sub categories. Effective this year, AMFI has started providing a more granular break-up of the passive funds. 

Against the previous classification of just 4 categories for passive funds, AMFI now provides classification of 13 categories of passive funds. You can now get a much more of a granular picture of how which specific categories of passive funds have shown growth and which funds have contracted; in terms of folios and in terms of the AUM. But will we come back to that in detail later. For now, let us start with why passive fund have taken off in a big way.

The rise and rise of passive funds

Jack Bogle, the founder of Vanguard Funds, famously said, “Why look for a needle in a haystack, when you can buy the entire haystack.” What he meant was that picking individual stocks may not add much value and a better option would be to pick a good index and just let the asset class do the job. In the last 3-5 years, indexing has picked up in a big and here is the reason these passive funds have become big.

• In the last few years, the active fund managers have struggled to beat the markets overall. The mid-caps and small cap fund managers had a better degree of success. But the real struggle was for the active large cap fund managers.

   

• Most of the equity fund managers have had problems with the Kurtosis effect in the last few years. Here is how it works. Most of the returns in the market have been generated by a handful of stocks in the index while a majority of the stock were either market performers or underperformers. Indian mutual funds have a 10% limit in terms of exposure to a stock and that means large cap fund managers are losing on performance.

   

• Passive funds are a lot simpler compared to active funds. There is a lot of effort in stock selection and yet statistically they don’t seem to be working. Also, fund performances of active funds have a high variance. So, the risk for the investors is not only about the equity markets, but also about finding the right fund manager.

   

• Above all, it was costs that made a lot of difference. For instance, an equity fund in large caps would have an all-in total expense ratio (TER) of around 2.6% to 2.7%. In contrast, the passive fund like an index ETF had a cost structure of less than 0.5% TER, This made these index funds and index funds substantially more efficient than the active funds.

However, the bigger factor that drove was the rise of the millennial investor. Armed with a much better knowledge of technology and asset allocation, these millennial investors have naturally gravitated through more systematic investment approaches like passive investments, SIPs etc.

How the passive funds grew on folios in FY24

The table below captures the actual folio numbers and the folio growth of the entire list of 12 categories of funds where there are existing folios. Folios are the investor accounts, that are unique to an AMC, but not necessarily unique to an investor. However, folio growth captures the retail intensity quite well. 

Passive Mutual Fund  Schemes (Folios)	Folios  Sep-23	Folios  Apr-23	Growth (%)
Silver ETF	1,26,285	75,891	66.40%
Fund of funds investing overseas in Passive Funds	5,58,746	3,74,286	49.28%
Equity oriented Index Funds (Domestic Index Funds)	49,57,937	35,59,102	39.30%
Income/Debt Oriented ETFs	19,37,222	18,67,689	3.72%
Equity oriented ETFs (International ETFs)	3,33,140	3,21,986	3.46%
Equity oriented ETFs (Domestic ETFs)	1,00,65,407	98,45,185	2.24%
Gold ETF	48,06,140	47,12,199	1.99%
Income/Debt Oriented Index Funds (Other than Target Maturity Index Funds)	15,545	15,613	-0.44%
Equity oriented Index Funds (International Index Funds)	2,36,782	2,38,189	-0.59%
Income/Debt Oriented Index Funds (Target Maturity Index Funds)	1,40,395	1,49,954	-6.37%
Fund of funds investing overseas in Active Funds	8,45,790	9,41,061	-10.12%
Other Index Funds	37,811	57,565	-34.32%
Total Folios with growth	2,40,61,200	2,21,58,720	8.59%

Data Source: AMFI (figures in actual numbers)

What do we read from the table above. We have compared the folios at the end of September 2023 with the folios at the end of April 2023. This would give you a picture of FY24, but that is the period for which we have this granular data on passive funds. Here are some key takeaways.

• Overall, the number of folios of passive funds have growth by 8.59% between April 2023 and September 2023, showing a sharp investor intensity in the last 5 months. The total folios of passive funds stand at close to 2.41 crore, which is nearly 15% of the total folios of the mutual fund segment as a whole.

   

• The leader of the pack was silver ETFs, a recent addition, which saw folios growing by 66.4% in the last 5 months. That is fantastic growth in a span of just 5 months, but it comes on a low base. Also, ever since it was introduced, there have been several NFOs that have added sharply to the folio numbers.

   

• The other two categories of fund that saw good traction were Passive Overseas Fund of Funds (FOF) that has grown folios by 49.3% in 5 months while equity oriented domestic index funds have also seen growth of 39.3% in this five month period.

   

• On the downside, the miscellaneous index funds category saw a sharp fall in investor folios of  -34.3% while actively managed overseas fund of funds (FOFs) also contracted folios by -10.12%. 

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 in the same period.

How the passive fund grew in terms of AUM

The table below captures the actual AUM of the entire list of 12 categories of passive funds where there are existing folios. Unlike folios, the assets under management (AUM) are a mix of fresh flows and also of accretion in value of the portfolio due to market appreciation. AUM may not be a good measure of retail intensity, unlike folios, but that is the proof of the pudding and AMCs and fund managers prefer to evaluate on overall AUM.

Passive Mutual  Fund Schemes	AUM  Sep-23	AUM  Apr-23	Growth (%)
Silver ETF	2,292.28	1,785.73	28.37%
Equity oriented Index Funds (Domestic Index Funds)	68,273.58	54,355.39	25.61%
Equity oriented ETFs (Domestic ETFs)	4,60,192.57	4,08,915.17	12.54%
Fund of funds investing overseas in Passive Funds	6,037.42	5,427.23	11.24%
Equity oriented ETFs (International ETFs)	8,735.51	7,975.68	9.53%
Income/Debt Oriented ETFs	89,503.76	83,483.85	7.21%
Equity oriented Index Funds (International Index Funds)	3,632.59	3,396.94	6.94%
Gold ETF	23,798.84	22,949.98	3.70%
Income/Debt Oriented Index Funds (Other than Target Maturity Index Funds)	14,366.41	14,385.82	-0.13%
Income/Debt Oriented Index Funds (Target Maturity Index Funds)	94,368.28	95,319.83	-1.00%
Other Index Funds	3,387.27	3,635.52	-6.83%
Fund of funds investing overseas in Active Funds	15,979.33	17,211.62	-7.16%
Total AUM with growth	7,90,567.84	7,18,842.76	9.98%

Data Source: AMFI (figures in Rupees in crore)

What do we decipher from the table above. We have compared the AUM of various categories of passive funds at the end of September 2023 with the relevant AUM at the end of April 2023. This would give you a picture of FY24, but that is the period for which we have this granular data on passive funds. Here are some key takeaways.

• Overall, the AUM of these passive funds have growth by 9.98% between April 2023 and September 2023, showing a sharp accretion in the last 5 months, emanating from better flows and also better market valuations. The total AUM of passive funds stand at close to 7.91 trillion. Equity oriented domestic ETFs at Rs4.60 trillion, accounted for over 58% 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. ETFs appear to be dominating AUM within passive funds.

   

• The leader of the pack was silver ETFs, a recent addition, which saw AUMs growing by 28.4% in the last 5 months. That is fantastic growth in a span of just 5 months, but it comes on a low base. Also, ever since it was introduced, there have been several NFOs that have added sharply to the folio numbers.

   

• The other categories of passive funds that saw good traction in the last five months were domestic index funds at 25.6% growth, equity oriented domestic index ETFs at 12.54% and FOFs investing in overseas passive indices at 11.2%.

   

• On the downside, the active overseas fund of funds (FOFs) saw AUM contracting by -7.16% while the miscellaneous index funds saw AUM contraction of -6.83%.

Out of the 12 categories of passive funds with live folios, 8 categories saw accretion in AUM over April 2023 while 4 funds saw contraction in folios in the same period. Passive funds have come of age, but it is this kind of granular data that really gives us the insights.