Passive Funds – First the macro story
Mutual fund growth post-pandemic has seen surge of interest in passive investments like index funds, index ETFs etc. We will look at the reasons for this trend later. Let us first capture how the AUM of index ETFs and index funds in India have grown over the last few years. The table below captures the growth story of the AUM (assets under management) of index equity ETFs, index debt ETFs and other passive products like gold ETFs and silver ETFs.
Period |
Equity ETF |
Debt ETF |
Gold ETF |
Silver ETF |
Total ETF |
Upto Mar-17 |
43,234 |
1,497 |
5,480 |
– |
50,211 |
Upto Mar-18 |
71,841 |
2,017 |
4,806 |
– |
78,664 |
Upto Mar-19 |
1,32,687 |
2,278 |
4,447 |
– |
1,39,412 |
Upto Mar-20 |
1,29,751 |
16,640 |
7,949 |
– |
1,54,340 |
Upto Mar-21 |
2,37,903 |
37,672 |
14,123 |
– |
2,89,698 |
Upto Mar-22 |
3,49,330 |
61,256 |
19,281 |
777 |
4,30,644 |
Upto Mar-23 |
3,97,082 |
85,406 |
22,737 |
1,792 |
5,07,017 |
Upto Dec-23 # |
5,29,859 |
90,135 |
27,326 |
3,033 |
6,50,353 |
Data Source: NSE
As we can see, the above table is updated up to December 2023 and provides a fairly updated view of listed ETFs in India. However, ETFs are just one side of the story. We also need to look at the growth of index funds (although they are relatively smaller in size) to get a full picture of passive investments and that is captured in the table below.
Period |
Equity Funds |
Debt Funds |
Gold Funds |
Total Funds |
Upto Mar-17 |
2,452 |
– |
– |
2,452 |
Upto Mar-18 |
3,061 |
– |
– |
3,061 |
Upto Mar-19 |
5,237 |
– |
– |
5,237 |
Upto Mar-20 |
8,056 |
– |
– |
8,056 |
Upto Mar-21 |
18,107 |
883 |
– |
18,990 |
Upto Mar-22 |
39,638 |
27,609 |
– |
67,247 |
Upto Mar-23 |
55,557 |
1,05,219 |
– |
1,60,776 |
Upto Dec-23 # |
89,480 |
1,10,143 |
– |
1,99,623 |
Data Source: NSE
One theme that stands out about the growth in passive assets, is the way they have grown at a frenetic subsequent to the COVID pandemic. Here are 2 pointers that underline the rapid growth of passive investing in India.
While the passive funds appear to have gained market share in folios in January 2024 over December 2023, they have lost market share by 45 bps on AUM over the same period. Let us now turn to how the passive flows in the recent periods have panned out.
How have passive flows panned out in recent years
One concern is that passive fund flows have slowed in recent quarters, and that is a rather logical scenario. Investors plump for passive when active strategies do not generate alpha. With a lot of alpha doing the rounds, investors are putting passive investments lower on their priority list. Here are how the flows into passive ETFs have tapered.
Period |
Mobilizations |
Redemptions |
Gross Flows |
Net Flows |
FY 2016-17 |
41,335 |
17,281 |
58,616 |
24,054 |
FY 2017-18 |
58,341 |
34,383 |
92,724 |
23,958 |
FY 2018-19 |
1,00,158 |
56,807 |
1,56,965 |
43,351 |
FY 2019-20 |
1,23,008 |
63,198 |
1,86,206 |
59,809 |
FY 2020-21 |
1,06,512 |
66,692 |
1,73,204 |
39,820 |
FY 2021-22 |
1,39,616 |
58,766 |
1,98,382 |
80,850 |
FY 2022-23 |
1,56,162 |
96,635 |
2,52,797 |
59,526 |
9M-2023-24 # |
98,022 |
72,721 |
1,70,743 |
25,301 |
Let us look at whether the flow data into passive index funds has been any different from passive ETFs, or whether the trend is the same.
Period |
Mobilizations |
Redemptions |
Gross Flows |
Net Flows |
FY 2019-20 |
8,222 |
3,205 |
11,427 |
5,017 |
FY 2020-21 |
12,880 |
8,301 |
21,181 |
4,579 |
FY 2021-22 |
55,920 |
11,161 |
67,081 |
44,759 |
FY 2022-23 |
1,26,511 |
30,840 |
1,57,351 |
95,671 |
9M-2023-24 # |
34,872 |
26,530 |
61,402 |
8,342 |
Data Source: NSE
The slowdown in flows is for real. Let us look at index ETFs first. The net inflows peaked in FY22 at ₹80,850 Crore. In FY23, it tapered to ₹59,526 Crore and in the first 9 months of FY24, it is quite tepid at ₹25,301 Crore. The picture is largely similarly in the case of index funds too. After peaking in FY23, the flows into index funds have fallen sharply. That means much of the AUM accretion in index ETFs and index funds in the last few months can be attributed to price accretion and not so much to robust flows. Let us turn to passive folios and passive AUM growth in January 2024; compared to April 2023.
How passive fund folios grew in January 2024 over April 2023
We can look at the growth of passive fund in India; either in terms of folios or AUM. Let us first look at growth in folios first. There are 13 categories of passive funds as classified by AMFI, but we dropped the category of “Other domestic ETFs”, due to zero folios. The table below captures actual folio numbers and the folio growth of the 12 categories of passive funds with active folios as of January 2024 over April 2023. Investor folios are unique investor accounts and not unique investors. However, it is a good proxy for retail intensity.
Passive Mutual Fund |
Folios Jan-24 |
Folios Apr-23 |
Growth |
Silver ETF |
1,89,756 |
75,891 |
150.04% |
Fund of funds investing overseas in Passive Funds |
7,70,535 |
3,74,286 |
105.87% |
Equity oriented Index Funds (Domestic Index Funds) |
62,53,215 |
35,59,102 |
75.70% |
Equity oriented ETFs (International ETFs) |
3,85,133 |
3,21,986 |
19.61% |
Other Index Funds |
62,741 |
57,565 |
8.99% |
Equity oriented ETFs (Domestic ETFs) |
1,06,02,197 |
98,45,185 |
7.69% |
Income/Debt Oriented ETFs |
20,03,408 |
18,67,689 |
7.27% |
Gold ETF |
49,72,469 |
47,12,199 |
5.52% |
Income/Debt Oriented Index Funds (Other than TMIF) |
15,285 |
15,613 |
-2.10% |
Equity oriented Index Funds (International Index Funds) |
2,30,293 |
2,38,189 |
-3.32% |
Income/Debt Oriented Index Funds (TMIF) |
1,41,111 |
1,49,954 |
-5.90% |
Fund of funds investing overseas in Active Funds |
7,86,121 |
9,41,061 |
-16.46% |
Total of Passive Schemes |
2,64,12,264 |
2,21,58,720 |
19.20% |
Data Source: AMFI (TMIF is target maturity index funds)
The above table compares the folios at the end of January 2024 with the folios at the end of April 2023. This is the granular data available right now, although a rolling yoy would be more useful. This still gives a ringside view of the trends in passive investments.
As of January 2024, out of the 12 categories of passive funds with live folios, 8 categories saw accretion in folios over April 2023 while 4 funds saw contraction in folios.
How AUM of passive funds shifted in January 2024
The table below captures the actual AUM of the 12 categories of passive funds with active folios. Unlike folios, the assets under management (AUM) are a mix of fresh flows and accretion in value due to stock market appreciation. Most passive equity funds have gained this year from index accretion. The AUM may not be a good measure of retail intensity, but fund managers love AUM, since it determines their fees. The table below checks AUM growth in January 2024 over April 2023; across passive categories.
Passive Mutual |
AUM Jan-24 |
AUM Apr-23 |
Growth |
Silver ETF |
3,704.54 |
1,785.73 |
107.45% |
Equity oriented Index Funds (Domestic Index Funds) |
89,217.72 |
54,355.39 |
64.14% |
Fund of funds investing overseas in Passive Funds |
7,547.24 |
5,427.23 |
39.06% |
Equity oriented ETFs (Domestic ETFs) |
5,20,654.37 |
4,08,915.17 |
27.33% |
Equity oriented ETFs (International ETFs) |
10,128.71 |
7,975.68 |
26.99% |
Gold ETF |
27,778.08 |
22,949.98 |
21.04% |
Equity oriented Index Funds (International Index Funds) |
4,077.89 |
3,396.94 |
20.05% |
Income/Debt Oriented ETFs |
92,756.97 |
83,483.85 |
11.11% |
Income/Debt Oriented Index Funds (Other than TMIF) |
14,660.23 |
14,385.82 |
1.91% |
Income/Debt Oriented Index Funds (TMIF) |
93,295.90 |
95,319.83 |
-2.12% |
Fund of funds investing overseas in Active Funds |
16,496.86 |
17,211.62 |
-4.15% |
Other Index Funds |
3,272.82 |
3,635.52 |
-9.98% |
Total of Passive Schemes |
8,83,591.32 |
7,18,842.76 |
22.92% |
Data Source: AMFI (TMIF is target maturity index funds)
We have compared AUM of various passive fund categories for January 2024 over April 2023. The share of passive funds in AUM is 16.76% and growing. Here is what we read.
The growth in passive AUM has come on the back of index accretion, even as flows have been hit by general slowing of flows into passive funds in the last 2 quarters.
Passive funds – What would be the big story in 2024
Passive funds have also looked for a big story. The first big phase of growth came prior to 2019, when passive funds took off as active large cap funds were struggling with the problem of kurtosis. However, that phase had its limits. The second big growth phase came post the pandemic, when investors actually appreciated the merits of staying invested for a long time. The focus also moved from stock selection to asset allocation; a trend that eminent benefits the passive funds over active funds.
For now, the story in the market is about chasing alpha, but such things do not last for ever. Globally, passive funds are a much bigger part of the markets, and that is more due to systematic asset allocation at an advisory level. However, the importance of passive funds in India cannot be underestimated. No less a person than Warren Buffet commended Jack Bogle (founder of Vanguard) for his immense contribution to public wealth creation in his 2016 annual report. After all, as even Bogle would have loved to sum it up; “why look for a needle in a haystack, when you can just buy the entire haystack.”
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