Passive fund traction slows down in January 2024

10 Feb 2024 , 10:07 AM

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 FY Reference	Equity ETF  (₹ Crore)	Debt ETF (₹ Crore)	Gold ETF (₹ Crore)	Silver ETF (₹ Crore)	Total ETF (₹ Crore)
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 FY Reference	Equity Funds (₹ Crore)	Debt Funds (₹ Crore)	Gold Funds (₹ Crore)	Total Funds (₹ Crore)
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.

1. Indian mutual funds have total assets under management (AUM) of ₹52.74 Trillion as of Jan 2024, of which the AUM of passive funds account for ₹8.84 Trillion. In short, passive funds account for about 16.76% pf the total MF AUM.

    

2. In term of folios, the mutual funds overall have a total of 16.96 Crore folios (unique investor accounts) of which 2.64 Crore investor folios belong to passive funds, which is nearly 15.58% of the overall folios of the mutual funds segment 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 FY Reference	Mobilizations (₹ Crore)	Redemptions (₹ Crore)	Gross Flows (₹ Crore)	Net Flows (₹ Crore)
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 FY Reference	Mobilizations (₹ Crore)	Redemptions (₹ Crore)	Gross Flows (₹ Crore)	Net Flows (₹ Crore)
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  Schemes (Folios)	Folios Jan-24  (in Numbers)	Folios Apr-23  (in Numbers)	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. 

• Passive fund folios have grown 19.20% as of end January 2024, vis-à-vis April 2023. That is a lot of investor intensity in last 8 months. The total folios of passive funds stand at nearly 264.12 Lakhs, which is 15.58% of overall mutual fund folios. 

   

• The leader of the pack in terms of folio growth was silver ETFs, a recent addition, which saw folios growing by 150.04% over April 2023. That is fantastic growth in a span of just 9 months, but it comes on a low base and is a new diversification option for investors. 

   

• The other two categories of fund that saw good traction were Passive Overseas Fund of Funds (FOF) that has grown folios by 105.87% over April 2023 and equity oriented domestic index funds that showed growth of 75.70% over April 2023. Equity oriented international ETFs also grew 19.61%.

   

• On the downside, the FOFs investing in overseas active funds saw a sharp fall in folios by -16.46% while the income oriented TMIFs and the equity oriented international funds saw contraction of -5.90% and -3.32% respectively over April 2023. Clearly, the move against discretionary investing is visible among passive funds too.

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  Fund Schemes	AUM Jan-24  (₹ Crore)	AUM Apr-23  (₹ Crore)	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 AUM of these passive funds have grown by 22.92% in January 2024 over April 2023. Over the last 3 months, this growth ratio has jumped from 9.16% to 21.59% to 22.92%. Of course, most of that AUM value accretion has come from a sharp spike in Nifty and Sensex. 

   

• Index ETF AUM has touched ₹6.27 Trillion and it has emerged as the single largest contributor to the overall mutual fund AUM. The second best category of liquid funds only has AUM of ₹4.31 Trillion. This is only the index ETFs and index funds also have AUM of ₹2.02 Trillion. Low cost structures have driven flows into passive funds & ETFs. 

   

• The leader of the pack in terms of AUM growth was, once again, silver ETFs, a recent addition, which saw AUMs growing by 107.45% over April 2023. That is fantastic growth in a span of just 9 months, but it comes on a low base. The other categories of passive funds that saw good traction in the last 9 months were domestic index funds at 64.14%, FOFs investing in overseas passive indices at 39.06%, domestic equity ETFs at 27.33%, and International equity ETFs at 26.99%.

   

• On the downside, miscellaneous index funds saw AUM contraction of -9.98% while FOFs in active overseas funds saw AUM contract by -4.15%. Out of the 12 categories of passive funds, 9 categories saw AUM accretion while 3 saw AUM contraction.

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.”