Passive Funds – The December story
Mutual fund growth post-pandemic has seen a lot of focus on passive investments like index funds, index ETFs etc. The table below gives you a quick picture of how the AUM of index ETFs and index funds in India have growth over the last few years. The table below captures the growth story of index ETFs and other passive products like gold 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 Sep-23 # |
4,68,926 |
89,521 |
23,799 |
2,291 |
5,84,537 |
However, ETFs are just one side of the story. We also need to look at the growth of index funds 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 Sep-23 # |
72,822 |
1,11,189 |
– |
1,84,011 |
Data Source: NSE
One theme that stands out about the growth in passive assets, is the way they have grown at a frenetic pace post-pandemic. Here are 2 pointers that will underline the rapid growth of passive investing in India.
However, what may be slightly disconcerting is that the passive funds appear to be facing the 7-year itch as the flows appear to be slowing after nearly 7 years of robust growth in passive AUM. Let us understand why.
God, is that the 7-year itch for passive funds?
OK, this has nothing to do with the iconic Marilyn Monroe photograph from the Seven Year Itch. Here we are referring to the popular belief that most good things face some resistance after 7 years. That appears to be the case with passive funds also. At least that is the picture you get by looking at the net flows into passive funds in the latest year. 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 |
H1-2023-24 # |
63,553 |
44,055 |
1,07,608 |
19,498 |
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 |
H1-2023-24 # |
20,699 |
16,501 |
37,200 |
4,198 |
Data Source: NSE
It looks like the seven year itch is playing out on the passive fund flows. Let us look at index ETFs first. The net inflows peaked in FY22 at Rs80,850 crore. In FY23, it tapered to Rs59,526 crore and in the first half of FY24, it is quite tepid at Rs19,498 crore. The picture is largely similarly in the case of index funds also. 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 more to price accretion than to robust flows. Let us turn to passive folios and passive AUM growth in December 2023; compared to April 2023.
How passive fund folios grew in December 2023 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 terms of folios. There are 13 categories of passive funds as classified by AMFI, but we 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 12 categories of passive funds with active folios. Investor folios are investor accounts unique to an AMC, but not necessarily unique to an investor. Folio growth is a good proxy for retail intensity.
Passive Mutual Fund |
Folios Dec-23 |
Folios Apr-23 |
Growth |
Silver ETF |
1,52,259 |
75,891 |
100.63% |
Fund of funds investing overseas in Passive Funds |
7,16,186 |
3,74,286 |
91.35% |
Equity oriented Index Funds (Domestic Index Funds) |
58,29,735 |
35,59,102 |
63.80% |
Equity oriented ETFs (International ETFs) |
3,55,392 |
3,21,986 |
10.37% |
Income/Debt Oriented ETFs |
19,87,250 |
18,67,689 |
6.40% |
Equity oriented ETFs (Domestic ETFs) |
1,03,28,959 |
98,45,185 |
4.91% |
Gold ETF |
49,11,226 |
47,12,199 |
4.22% |
Other Index Funds |
58,245 |
57,565 |
1.18% |
Equity oriented Index Funds (International Index Funds) |
2,36,818 |
2,38,189 |
-0.58% |
Income/Debt Oriented Index Funds (Other than TMIF) |
15,324 |
15,613 |
-1.85% |
Income/Debt Oriented Index Funds (TMIF) |
1,43,325 |
1,49,954 |
-4.42% |
Fund of funds investing overseas in Active Funds |
8,00,853 |
9,41,061 |
-14.90% |
Total Folios with growth |
2,55,35,572 |
2,21,58,720 |
15.24% |
Data Source: AMFI (TMIF is target maturity index funds)
The above table compares the folios at the end of December 2023 with the folios at the end of April 2023. While this is a relatively short term picture, that is the granular data available. It still gives a ringside view of the trends in passive investments.
As of December 2023, 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 as of December 2023.
How the passive funds AUM shifted in December 2023
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 of the portfolio due to market appreciation. Most of the 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 as that is what their fees are based on. The table below looks at AUM growth in December over April 2023; across passive categories.
Passive Mutual |
AUM Dec-23 |
AUM Apr-23 |
Growth |
Silver ETF |
3,031.62 |
1,785.73 |
69.77% |
Equity oriented Index Funds (Domestic Index Funds) |
84,379.58 |
54,355.39 |
55.24% |
Fund of funds investing overseas in Passive Funds |
7,382.28 |
5,427.23 |
36.02% |
Equity oriented ETFs (Domestic ETFs) |
5,19,927.53 |
4,08,915.17 |
27.15% |
Equity oriented ETFs (International ETFs) |
9,931.89 |
7,975.68 |
24.53% |
Equity oriented Index Funds (International Index Funds) |
4,048.45 |
3,396.94 |
19.18% |
Gold ETF |
27,326.41 |
22,949.98 |
19.07% |
Income/Debt Oriented ETFs |
90,131.30 |
83,483.85 |
7.96% |
Income/Debt Oriented Index Funds (Other than TMIF) |
14,639.51 |
14,385.82 |
1.76% |
Income/Debt Oriented Index Funds (TMIF) |
93,369.60 |
95,319.83 |
-2.05% |
Fund of funds investing overseas in Active Funds |
16,681.73 |
17,211.62 |
-3.08% |
Other Index Funds |
3,222.08 |
3,635.52 |
-11.37% |
Total AUM with growth |
8,74,072.00 |
7,18,842.76 |
21.59% |
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 December 2023 over April 2023. The share of passive funds in AUM is 17.21% and growing. Here are key takeaways from the December 2023 passive story.
The growth in passive AUM has come on the back of index accretion, even as flows have faced the seven year itch. Here is what year 2024 holds for passive funds.
Passive funds – how will it pan out in 2024?
It is hard to say at this point of time, but the type of frenetic rally we saw in the markets in 2023 may not be repeated in 2024. That means, the big attraction for alpha hunting funds would gradually slowdown in the coming year. In India, passive funds are still being driven as part of cycles, whereas it should ideally be a part of the allocation. Your portfolio; equity and debt, should have a part of the allocation made to passive. That is a better approach than trying to time when to buy active fund and when to buy passive funds. Also, even in the current year, passive funds like index funds and index ETFs have given stellar returns. That is something investors really cannot overlook.
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