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Passive funds pick up growth momentum in December 2023

10 Jan 2024 , 10:02 AM

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

Indian mutual funds have a total assets under management (AUM) of Rs50.78 trillion, of which the AUM of passive funds account for Rs8.74 trillion. In short, passive funds account for about 17.21% pf the total MF AUM.
In term of folios, the mutual funds overall have a total of 16.49 crore folios (unique investor accounts) of which 2.55 crore investor folios belong to passive funds, which is nearly 15.49% of the overall folios of the mutual funds segment 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 FY Reference	Mobilizations (₹ in crore)	Redemptions (₹ in crore)	Gross Flows (₹ in crore)	Net Flows (₹ in 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
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 FY Reference	Mobilizations (₹ in crore)	Redemptions (₹ in crore)	Gross Flows (₹ in crore)	Net Flows (₹ in 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
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 Schemes (Folios)	Folios Dec-23 (in Numbers)	Folios Apr-23 (in Numbers)	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.

Passive fund folios have grown 15.24% as of end December 2023, 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 255.36 lakhs, which is 15.49% 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 100.63% over April 2023. That is fantastic growth in a span of just 8 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 91.35% over April 2023 and equity oriented domestic index funds that showed growth of 63.80% over April 2023. Equity oriented international ETFs also grew in double digits.
On the downside, the FOFs investing in overseas active funds saw a sharp fall in folios by -14.90% while the income oriented TMIFs and the miscellaneous passive funds category also saw contraction of -4.42% and -1.85% respectively over April 2023. Clearly, the move against discretionary investing is visible among passive funds.

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 Fund Schemes	AUM Dec-23 (₹ in crore)	AUM Apr-23 (₹ in crore)	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 AUM of these passive funds have grown by 21.59% in December 2023 over April 2023. Over the last 2 months, this growth ratio has jumped from 9.16% to 21.59%; and most of that AUM value accretion has come from a sharp rise in the Nifty and the Sensex. That is not surprising considering that the generic indices have rallied sharply in the last two months of the year to scale lifetime highs.
Index ETF AUM has touched Rs6.23 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 Rs3.78 trillion. This is only the index ETFs and the index funds also have AUM of close to Rs2 trillion. Apart from the low cost structure driving flows, equity oriented index fund also gained from the index rally.
The leader of the pack in terms of AUM growth was, once again, silver ETFs, a recent addition, which saw AUMs growing by 69.77% over April 2023. That is fantastic growth in a span of just 6 months, but it comes on a low base. The other categories of passive funds that saw good traction in the last 8 months were domestic index funds at 55.24%, FOFs investing in overseas passive indices at 36.02%, domestic equity ETFs at 27.15%, and International equity ETFs at 24.53%.
On the downside, miscellaneous index funds saw AUM contraction of -11.37% while FOFs in active overseas funds saw AUM contract by -3.08%. 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 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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