Passive funds see tepid flows, despite better returns in Sep-24

14 Oct 2024 , 10:59 AM

PASSIVE FLOW STORY FOR SEPTEMBER 2024

Passive funds have attracted a lot of buying interest in the last few years. There were several reasons. As markets got more institutionalized, alpha was much harder to come by. Kurtosis only added to the problems since most mutual funds struggled to beat the index with stock level restrictions. More so, when a handful of stocks normally drive the indices higher. In these complex times, index funds and index ETFs came as the answer. When 80% of the fund managers were struggling to beat the index, buying the index makes you straight away better than 80% of the fund managers in India. More importantly, passive funds and ETFs are low cost products, which has a magnifying impact; mentally and financially. However, in the last few months, the enthusiasm of investors for passive funds has wavered as they keep exploring alpha options like mid-cap funds, small cap funds, sectoral funds, thematic funds etc. But, as an asset class, passive funds are surely here to stay!

The net inflows into passive funds at ₹3,254 Crore in September 2024, was sharply lower than ₹14,599 Crore in August 2024. Let us look at specific category-wise flows among the passives; and let us start with the positive flows. Equity oriented domestic index funds and equity oriented domestic ETFs saw bulk of the passive net inflows at ₹6,608 Crore and ₹4,910 Crore respectively in September 2024. This was followed by Gold ETFs at ₹1,233 and Silver ETFs at ₹646 Crore. There were several categories that saw net outflows in September 2024. These included Debt oriented ETFs ₹(5,135) Crore, Debt Oriented TMIFs ₹(3,227) Crore, and debt oriented index funds ex-TMIFs ₹(1,341) Crore. The selling pressure in debt oriented index funds was clearly higher in September. Out of the 12 categories of passive funds with flows; 4 categories showed positive net flows and 8 showed negative flows.

HOW INDEX FUNDS AND INDEX ETF PERFORMED IN SEPTEMBER 2024

How did the overall universe of active and passive index funds and ETFs (except FOFs) perform in term of returns on a 1 year basis, 3-year basis, and since inception. We have considered regular plan returns for the rankings and ranked on 3-year CAGR returns. There are 371 index funds and ETFs overall in the mutual fund universe in India, with a combined AUM of ₹10,83,007 Crore. Here the Top-25 index funds / ETFs ranked on 3-year returns.

Passive Fund Scheme Name	1 Year (%) Returns		3-Year (%) Returns		Launch (%) Returns	AUM (₹ Crore)
NIFTY CPSE Total Return Index	84.98	46.39		17.77		42,413.38
NIFTY PSU Bank Total Return Index	28.26	38.16		5.54		1,297.46
NIFTY PSU Bank Total Return Index	28.30	38.16		6.33		2,432.96
BSE Bharat 22 Total Return Index	52.95	35.79		17.69		19,866.11
NIFTY Midcap 100 Total Return Index	47.11	23.96		16.43		551.06
NIFTY Midcap 150 Total Return Index	46.00	23.53		26.04		1,788.84
NIFTY Midcap 150 Total Return Index	46.05	23.50		29.14		424.12
NIFTY Dividend Opportunities 50 TRI	48.10	23.21		16.62		74.51
NIFTY Midcap 150 Total Return Index	45.39	22.72		28.36		292.27
Nifty 200 Momentum 30 Total Return Index	61.76	22.65		29.43		8,542.61
NIFTY Midcap 150 Total Return Index	44.98	22.58		29.92		1,948.85
NIFTY Midcap 150 Total Return Index	44.95	22.55		28.24		1,630.68
NIFTY Smallcap 250 Total Return Index	46.94	22.45		30.61		824.65
NIFTY Smallcap 250 Total Return Index	46.74	22.33		37.00		1,872.66
BSE Sensex Next 50 Total Return Index	53.58	22.33		19.73		24.4
BSE Sensex Next 50 Total Return Index	53.53	22.31		19.41		20.26
BSE Sensex Next 50 Total Return Index	53.23	22.03		23.75		44.86
NYSE FANG+ Total Return Index	54.18	21.76		22.67		2,454.66
NIFTY Infrastructure Total Return Index	46.41	21.21		6.85		161.7
NIFTY Next 50 Total Return Index	68.19	21.05		19.63		64.05
NIFTY Next 50 Total Return Index	68.10	21.04		15.43		2,554.03
NIFTY Next 50 Total Return Index	68.11	21.03		16.57		1,066.40
NIFTY Next 50 Total Return Index	68.07	20.99		16.21		3,169.63
NIFTY Next 50 Total Return Index	67.92	20.94		20.15		5,746.99
NIFTY Next 50 Total Return Index	68.05	20.93		22.69		334.67
NIFTY CPSE Total Return Index	84.98	46.39		17.77		42,413.38
NIFTY PSU Bank Total Return Index	28.26	38.16		5.54		1,297.46
NIFTY PSU Bank Total Return Index	28.30	38.16		6.33		2,432.96
BSE Bharat 22 Total Return Index	52.95	35.79		17.69		19,866.11
NIFTY Midcap 100 Total Return Index	47.11	23.96		16.43		551.06

Data Source: AMFI

The family of passive funds have a total of 371 funds across equity generic index funds, equity sectoral index funds, as well as debt index funds and ETFs. These 371 passive funds manage total AUM of ₹10,83,007 Crore as of October 10, 2024. Over a 1 year period, the average return of these passive funds stands at an impressive 30.38%, despite including equity and debt index funds. If you look at 3-year returns CAGR, average returns are still impressive at 14.68%. If you look at returns since inception, then the average returns stand at an impressive 17.97% on a CAGR basis. One can argue that many of these passives are not comparable, but it is a good passive portfolio proxy spread across equity indices, bond indices, and thematic indices.

HOW FUND OF FUNDS (FOF) PERFORMED IN SEPTEMBER 2024

How has the overall universe of active and passive fund of funds (FOFs), both domestic and global, performed over 1-year, 3-years, and since inception. We have considered regular plans in this case. There are 126 fund of funds (FOFs) overall, with a combined AUM of ₹1,11,278 Crore. Here are Top-25 fund of funds (FOFs) ranked on 3-Year CAGR returns.

Passive Fund Scheme Name	1 Year (%) Returns	3-Year (%) Returns	Launch (%) Returns	AUM (₹ Crore)
ICICI Prudential BHARAT 22 FOF	53.06	35.48	21.40	2,156.31
ICICI Prudential India Equity FOF	45.63	21.43	27.27	148.79
Mirae Asset NYSE FANG+ ETF FOF	50.74	20.85	22.58	1,470.93
Nippon India Nifty Next 50 Junior BEES FOF	68.03	20.58	19.99	521.94
ICICI Pru Nifty Alpha Low – Volatility 30 ETF FOF	52.54	18.78	18.29	782.75
ICICI Pru Thematic Advantage Fund (FOF)	37.91	18.65	15.94	1,953.01
Kotak Multi Asset Allocator FOF – Dynamic	30.74	18.20	16.66	1,608.37
Nippon India Asset Allocator FOF	31.14	17.71	20.94	287.75
ICICI Prudential Passive Strategy Fund (FOF)	35.33	16.67	14.28	180.41
Invesco India Gold ETF FOF	28.01	15.78	6.19	88.1
LIC MF Gold ETF FOF	28.07	15.71	5.79	64.18
Mirae Asset Equity Allocator FOF	35.93	15.67	25.67	876.71
Axis Gold Fund	27.73	15.65	6.36	614.09
ABSL Financial Planning FOF Aggressive Plan	32.86	15.65	13.20	223.72
SBI Gold Fund	28.38	15.52	6.29	2,279.31
Quantum Gold Savings Fund	28.52	15.50	12.09	131.5
HDFC Gold Fund	28.21	15.44	6.55	2,529.43
ICICI Prudential Regular Gold Savings Fund (FOF)	28.17	15.38	6.81	1,178.07
Nippon India Passive Flexicap FOF	36.46	15.37	22.12	244.17
Nippon India Gold Savings Fund	28.32	15.36	8.19	2,044.10
Mirae Asset S&P 500 Top 50 ETF FOF	35.38	15.21	15.43	533.33
Aditya Birla Sun Life Gold Fund	27.57	15.16	6.50	396.37
ICICI Prudential Nifty 100 Low Volatility 30 ETF FOF	38.29	15.08	19.28	1,381.13
Kotak Gold Fund	27.98	15.00	8.26	2,133.47
Quantum Equity FOF	36.64	14.96	14.55	132.5

Data Source: AMFI

The family of fund of funds (FOFs) have a total of 126 funds across equity, debt, domestic and international FOFs. These 126 passive fund of funds (FOFs) handle total AUM of ₹1,11,278 Crore as of October 10, 2024. Over a 1 year period, the average return of these fund of funds (FOFs) stands at an impressive 26.40%, and this includes equity and debt index FOFs, as well as domestic and international FOFs. However, the returns are relatively lower at 10.25% on an average over 3-years (with some global FOFs giving negative returns). The returns since inception averaged 11.56%.

PASSIVE FUND FOLIO GROWTH: SEPTEMBER 2024 OVER SEPTEMBER 2023

There have been concerns that retail has not adapted to passive funds with the same enthusiasm and gusto as they have done with active funds. However, the folios growth numbers tell a more optimistic story. First we focus on the folio growth. There are 13 categories of passive funds as identified by AMFI, but only 12 categories have meaningful flows. The category of “Other domestic ETFs” has, therefore, been ignored. The table below compares the folio numbers of the remaining 12 categories of passive funds as of end September 2024 over September 2023. Passive categories are ranked on folio growth. It may be skewed in favour of small base categories, but that is not bad, after all.

Passive Mutual Fund Schemes (Folios)	Folios Sep-24 (in Numbers)	Folios Sep-23 (in Numbers)	Growth (%)
Silver ETF	4,24,295	1,26,285	235.98%
Other Index Funds	84,812	37,811	124.31%
Equity oriented Index Funds (Domestic Index Funds)	1,07,18,237	49,57,937	116.18%
Equity oriented ETFs (International ETFs)	5,69,371	3,33,140	70.91%
Equity oriented ETFs (Domestic ETFs)	1,34,56,546	1,00,65,407	33.69%
Fund of funds investing overseas in Passive Funds	6,70,932	5,58,746	20.08%
Gold ETF	57,10,499	48,06,140	18.82%
Income/Debt Oriented ETFs	22,78,337	19,37,222	17.61%
Income/Debt Oriented Index Funds (TMIF)	1,60,083	1,40,395	14.02%
Equity oriented Index Funds (International Index Funds)	2,55,969	2,36,782	8.10%
Income/Debt Oriented Index Funds (Other than TMIF)	14,577	15,545	-6.23%
Fund of funds investing overseas in Active Funds	7,16,175	8,45,790	-15.32%
Total of Passive Funds	3,50,59,833	2,40,61,200	45.71%

Data Source: AMFI (TMIF is target maturity index funds)

The above table compares the folios at the end of September 2024 with the folios at the end of September 2023 (12-month yoy growth). Here are the inferences.

• Passive fund folios yoy growth in September 2024 stood at 45.71%; as compared to 42.57% in August 2024, 38.86% in July 2024, 34.24% in June 2024, and 32.40% in May 2024. That is progressive build-up of investor intensity, if you go purely by growth in folios. The total folios of passive funds as of September 2024 stands at 350.60 Lakhs; compared to 336.83 in August 2024, 321.81 Lakh folios in July 2024, 305.01 Lakh folios in June 2024, and 296.43 Lakh folios in May 2024. The yoy growth is steadily higher, and it is a signal that passive retail spread is gradually getting built.
  
• Which categories of passive funds led the growth in folios?. The leader was silver ETFs, a recent addition, which saw folios growing 235.98% over September 2023. That is fantastic growth in 12 months, despite a relatively small base.
  
• The other 3 categories of funds that saw good traction were other index funds at 124.31%, equity oriented domestic index funds with folio growth of 116.18%, and equity oriented international ETFs at 70.91%.
  
• Which were the laggards in this folio growth list? Once again, the FOFs investing in overseas active funds saw folio contraction of by -15.32% while the income oriented index funds (other than TMIFs) saw contraction of -6.23% in September 2024.

As of September 2024, out of the 12 categories of passive funds with active folios, 10 categories saw accretion in folios over September 2023. Three categories doubled folios in last one year, and 9 of these passive categories displayed double-digit folios growth.

PASSIVE FUNDS AUM: SEPTEMBER 2024 OVER SEPTEMBER 2023

The table below captures the assets under management (AUM) of the 12 categories of passive funds with active AUM as of the close of September 2024. Unlike folios, AUM is a mix of fresh flows and market cap accretion. It measures heft, beyond pure retail intensity.

Passive Mutual Fund Schemes	AUM Sep-24 (₹ Crore)	AUM Sep-23 (₹ Crore)	Growth (%)
Silver ETF	10,839.98	2,292.28	372.89%
Equity oriented Index Funds (Domestic Index Funds)	1,55,394.94	68,273.58	127.61%
Gold ETF	39,823.50	23,798.84	67.33%
Equity oriented ETFs (Domestic ETFs)	6,87,729.81	4,60,192.57	49.44%
Equity oriented Index Funds (International Index Funds)	5,203.90	3,632.59	43.26%
Equity oriented ETFs (International ETFs)	12,443.01	8,735.51	42.44%
Fund of funds investing overseas in Passive Funds	8,352.69	6,037.42	38.35%
Income/Debt Oriented ETFs	99,259.97	89,503.76	10.90%
Fund of funds investing overseas in Active Funds	17,513.71	15,979.33	9.60%
Other Index Funds	3,563.03	3,387.27	5.19%
Income/Debt Oriented Index Funds (TMIF)	91,980.16	94,368.28	-2.53%
Income/Debt Oriented Index Funds (Other than TMIF)	13,549.21	14,366.41	-5.69%
Total of Passive Funds	11,45,653.90	7,90,567.84	44.92%

Data Source: AMFI (TMIF is target maturity index funds)

We have compared AUM of the 12 passive fund categories (with active folios) for September 2024 over September 2023. The share of passive funds in AUM had fallen below 17% in May 2024, but bounced back to 17.14% in June 2024. However, the share again fell to 16.86% in July 2024; and fell further to 16.80% in August 2024. Thanks to a rally in equity and debt indices; the AUM share of passive funds is back at 17.08% in September 2024.

• AUM of passive funds grew 44.92% in September 2024; compared to 44.62% in August, 40.19% in July, 37.84% in June, and 32.86% in May 2024 on a yoy basis. Much of the accretion in the AUM has obviously come from Nifty and Sensex touching all-time highs, as well as longer debt indices also rallying on rate cut hopes. Not surprisingly, AUM growth has been more pronounced in the equity oriented passive categories. However, the tapering bond yield helped passive debt AUM to offset the outflows.
  
• Index ETF AUM of domestic ETFs touched ₹6.87 Trillion and it remains the single largest contributor to the overall mutual fund AUM. In fact, the equity index ETF AUM is also the largest class of fund in India in terms of AUM across all MF categories.
  
• The leader of the pack in terms of AUM growth in September 2024 over September 2023 was led by silver ETFs, a recent addition, which saw AUMs growing by 372.89% yoy. The other categories of passive funds that saw good traction in the last 12 months were domestic equity index funds at 127.61%, Gold ETFs at 67.33%, equity oriented domestic ETFs at 49.44%, and Equity oriented International Index Funds at 43.26%.
  
• On the downside, debt oriented index funds (other than TMIFs) saw contraction in AUM of -5.69 while debt oriented TMIFs saw contraction of -2.53%. The remaining 10 categories of passive funds saw positive accretion in AUM in September 2024. Out of the passive categories with AUM accretion; 2 categories more than doubled, 6 categories grew more than 40% yoy, and 8 categories saw double-digit growth.

The growth in passive AUM has come on the back of index accretion, but also at a time when the market volatility and uncertainty levels have been high. Indications are getting stronger that passive is back in business!