Passive funds show strong traction in May 2024

12 Jun 2024 , 10:12 AM

In India, one big trend post the pandemic has been the rise of passive funds as a preferred asset class. It is not just about active fund managers struggling to beat the index. It is also about the simplicity, flexibility, and the intrinsic diversification value of passive funds. But, above all, it was about the costs, since the total expense ratio (TER) of passive funds was sharply lower than active fund by 100 to 150 bps and that made all the difference. More importantly, this difference gets compounded sharply over a longer time frame.

The result was a huge shift to passive funds. The India passive funds story can be divided into 4 segments viz. index funds, index ETFs, commodity ETFs and fund of funds (FOFs). Today, passive funds account for 16.7% of the AUM of the mutual fund sector overall and about 15.9% of the overall folios. The AMFI data on a monthly basis, focuses in depth on the passive funds at a granular level. Here, we look at passive funds (index funds, ETFs and FOFs) in terms of past returns, category wise AUM and category wise folios growth for May 2024, as compared to the data for May 2023.

HOW INDEX FUNDS AND INDEX ETF PERFORMED IN MAY 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 and since inception. We have considered regular plans data for the rankings. There are 350 index funds and ETFs overall in the mutual fund universe in India, with a combined AUM of ₹9,77,314 Crore. Here the Top-20 funds on returns since launch.

Passive Fund Scheme Name	1 Year (%) Returns		Launch (%) Returns	Daily AUM (₹ Crore)
UTI Nifty 500 Value 50 Index Fund	91.36	84.81		317.95
ICICI Prudential Nifty PSU Bank ETF	81.91	76.91		77.45
Kotak Nifty Smallcap 50 Index Fund	70.06	72.96		65.02
HDFC NIFTY Smallcap 250 Index Fund	58.60	64.40		193.65
Motilal Oswal S&P BSE Enhanced Value Index Fund	91.23	63.54		617.36
Motilal Oswal S&P BSE Enhanced Value ETF	94.26	62.48		93.50
HDFC NIFTY Midcap 150 Index Fund	54.00	58.06		161.68
HDFC NIFTY Smallcap 250 ETF	60.48	55.75		321.14
HDFC NIFTY Midcap 150 ETF	55.93	51.44		38.61
UTI BSE Housing Index Fund	51.91	50.56		23.83
ICICI Prudential Nifty Auto Index Fund	69.91	50.32		111.43
Edelweiss Nifty Midcap150 Momentum 50 Index Fund	71.56	46.33		398.96
HDFC NIFTY200 Momentum 30 ETF	67.86	44.43		53.60
ICICI Prudential Nifty 200 Momentum 30 ETF	67.92	42.94		207.96
Tata Nifty Midcap 150 Momentum 50 Index Fund	71.15	42.86		360.64
Aditya Birla Sun Life Nifty 200 Momentum 30 ETF	68.44	41.10		67.72
ICICI Prudential Nifty 200 Momentum 30 Index Fund	66.29	40.66		303.30
Edelweiss Nifty Smallcap 250 Index Fund	59.23	40.00		58.60
SBI Nifty Smallcap 250 Index Fund	59.12	39.80		832.51
HDFC BSE 500 Index Fund	35.96	39.06		139.53

Data Source: AMFI

The family of passive funds have a total of 350 funds across equity generic index funds, equity sectoral index funds, as well as debt index funds and ETFs. These 350 passive funds manage total AUM of ₹9,77,314 Crore as of June 10, 2024. Over a 1 year period, the average return of these 350 passive fund stands at an impressive 29.76%, despite including equity and debt index funds. If you look at these 350 funds in terms of returns since inception, then the average returns stand at an impressive 17.32% on a CAGR basis.

HOW FUND OF FUNDS (FOF) PERFORMED IN MAY 2024

How is the overall universe of active and passive fund of funds (FOFs), both domestic and global, in term of returns on a 1 year basis and since inception. We have considered regular plans in this case. There are 115 fund of funds (FOFs) overall in the mutual fund universe in India, with a combined AUM of ₹1,01,081 Crore. Here the Top-20 fund of funds (FOFs) on returns since launch.

Passive Fund Scheme Name	1 Year (%) Returns		Launch (%) Returns	Daily AUM (₹ Crore)
Axis NASDAQ 100 FOF	31.57	38.58		173.02
Mirae Asset Global X AI & Technology ETF FOF	29.09	34.83		328.36
Axis Silver FOF	20.09	29.79		41.70
HDFC Silver ETF FOF	19.75	29.63		90.87
Mirae Asset Nifty India Manufacturing ETF FOF	59.36	28.01		93.54
ICICI Prudential India Equity FOF	47.97	26.73		117.31
Mirae Asset Equity Allocator FOF	35.82	25.57		803.44
Mirae Asset NYSE FANG+ ETF FOF	56.28	25.26		1,543.40
Aditya Birla Sun Life Multi – Index FOF	36.00	24.97		14.47
Edelweiss Gold and Silver ETF FOF	17.83	24.08		93.91
Motilal Oswal Nasdaq 100 FOF	32.58	23.54		4,797.51
Motilal Oswal Gold and Silver ETFs FOF	17.69	22.88		69.91
UTI Gold ETF FOF	17.55	22.09		98.10
Nippon India Passive Flexicap FOF	36.96	21.66		236.65
ICICI Prudential BHARAT 22 FOF	66.51	21.56		1,451.24
Edelweiss US Technology Equity FOF	28.56	20.83		2,205.38
Nippon India Asset Allocator FOF	32.52	20.64		228.38
Invesco India – Invesco EQQQ NASDAQ-100 ETF FOF	32.15	20.17		400.73
Axis Equity ETFs FOF	36.64	20.12		20.09
Nippon India Nifty Next 50 Junior BEES FOF	63.31	19.62		426.36

Data Source: AMFI

The family of fund of funds (FOFs) have a total of 115 funds across equity, debt, domestic and international FOFs. These 115 passive fund of funds (FOFs) handle total AUM of ₹1,01,081 Crore as of June 10, 2024. Over a 1 year period, the average return of these 115 fund of funds (FOFs) stands at an impressive 21.06%, since this includes equity and debt index FOFs, as well as domestic and international FOFs. If you look at these 115 FOFs in terms of returns since inception, then the average returns stand at a more subdued 11.88% CAGR, which is still above average.

PASSIVE FUND FOLIO GROWTH: MAY 2024 OVER MAY 2023

One can evaluate the growth of passive funds in India; either in terms of folio growth or AUM growth. While folios represent the investor accounts, the AUM is a mix of flows and market value appreciation. Actually, both have their own value and hence we will look at both the parameters. Let us look at growth in folios. There are 13 categories of passive funds as identified by AMFI, but the “Other domestic ETFs”, category was dropped due to zero folios. The table below compares the folio numbers of these 12 categories of passive funds as of end May 2024 over May 2023.

Passive Mutual Fund Schemes (Folios)	Folios May-24 (in Numbers)	Folios May-23 (in Numbers)	Growth (%)
Silver ETF	2,48,738	89,289	178.58%
Equity oriented Index Funds (Domestic Index Funds)	78,87,156	37,97,021	107.72%
Fund of funds investing overseas in Passive Funds	7,30,456	4,00,457	82.41%
Equity oriented ETFs (International ETFs)	4,42,956	3,16,029	40.16%
Other Index Funds	74,272	57,067	30.15%
Equity oriented ETFs (Domestic ETFs)	1,16,39,874	98,21,908	18.51%
Income/Debt Oriented ETFs	21,46,074	18,55,797	15.64%
Gold ETF	53,20,483	47,28,425	12.52%
Equity oriented Index Funds (International Index Funds)	2,41,750	2,35,879	2.49%
Income/Debt Oriented Index Funds (TMIF)	1,45,510	1,49,334	-2.56%
Income/Debt Oriented Index Funds (Other than TMIF)	15,021	15,604	-3.74%
Fund of funds investing overseas in Active Funds	7,50,436	9,22,395	-18.64%
Total of Passive Funds	2,96,42,726	2,23,89,205	32.40%

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

The above table compares the folios at the end of May 2024 with the folios at the end of May 2023 (12-month growth). Here is what we infer.

• Passive fund folios grew 32.40% yoy between May 2023 and May 2024. That is a lot of investor intensity in last 12 months. The total folios of passive funds stand at 296.43 Lakh folios; as compared to 287.09 Lakhs folios, 279.63 Lakh folios, and 272.54 Lakh folios in the previous 3 months of April, March, and February 2024.
• Which is the specific category of passive fund that led the growth. The leader was silver ETFs, a recent addition, which saw folios growing 178.58% over May 2023. That is fantastic growth in 12 months, although the base was relatively small.
• The other two categories of funds that saw good traction were equity oriented domestic index funds that showed folio growth of 107.72% between April 2023 and April 2024. In addition, FOFs investing in passive global funds also grew 82.41% yoy, while Equity oriented international ETFs also grew 40.16%. Top rankings have been the same as April.
• Which were the laggards in this folio growth list? On the downside, the FOFs investing in overseas active funds continued to see a sharp fall in folios by -18.64% while the income oriented index funds (other than TMIFs) and the Target Maturity index funds (TMIF) saw contraction of -3.74% and -2.56% respectively in May 2024 yoy.

As of May 2024, out of the 12 categories of passive funds with active folios, 9 categories saw accretion in folios over May 2023; with 8 of them growing folios in double digits.

PASSIVE FUNDS AUM: MAY 2024 OVER MAY 2023

The table below captures the AUM of the 12 categories of passive funds with active AUM as of the close of May 2024. Unlike folios, AUM is a mix of fresh flows and market cap accretion. The AUM may not be a good measure of retail intensity, but it measures heft.

Passive Mutual Fund Schemes	AUM May-24 (₹ Crore)	AUM May-23 (₹ Crore)	Growth (%)
Silver ETF	7,017.83	1,852.20	278.89%
Equity oriented Index Funds (Domestic Index Funds)	1,12,754.33	57,490.84	96.13%
Equity oriented ETFs (Domestic ETFs)	5,81,164.02	4,22,391.92	37.59%
Gold ETF	31,689.35	23,128.11	37.02%
Fund of funds investing overseas in Passive Funds	8,000.62	5,844.33	36.90%
Equity oriented ETFs (International ETFs)	11,161.87	8,693.26	28.40%
Equity oriented Index Funds (International Index Funds)	4,526.86	3,530.14	28.23%
Income/Debt Oriented ETFs	97,981.60	86,672.39	13.05%
Income/Debt Oriented Index Funds (Other than TMIF)	14,796.41	14,358.50	3.05%
Income/Debt Oriented Index Funds (TMIF)	94,259.49	95,249.03	-1.04%
Fund of funds investing overseas in Active Funds	17,029.16	17,531.47	-2.87%
Other Index Funds	3,374.60	3,675.69	-8.19%
Total of Passive Funds	9,83,756.13	7,40,417.88	32.86%

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

We have compared AUM of the 12 passive fund categories (with active folios) for May 2024 over May 2023. The share of passive funds in AUM stood at nearly 18% as of April 2024, but fell below 17% in May 2024.Here are key takeaways from the passive AUM data.

• AUM of passive funds grew 32.86% in May 2024 over May 2023. Much of the accretion in the AUM has obviously come from Nifty and Sensex touching all-time highs, even in the midst of the election uncertainty and the elevated VIX levels.
• Index ETF AUM has touched ₹5.81 Trillion and it has emerged as 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.
• The leader of the pack in terms of AUM growth in May 2024 over May 2023 was led by silver ETFs, a recent addition, which saw AUMs growing by 278.89% yoy. The other categories of passive funds that saw good traction in the last 12 months were domestic equity index funds at 96.13%, equity oriented domestic ETFs at 37.6%, Gold ETFs at 37.02%, and domestic equity oriented ETFs at 36.09%.
• On the downside, miscellaneous index funds saw AUM contraction of -8.19% while FOFs investing in active funds contracted -2.87%, while target Maturity Index Funds (TMIF) saw AUM contract by -1.04%. Out of the 12 categories of passive funds with existing folios, 9 categories of passive funds saw AUM accretion while 3 categories saw AUM contraction.

The growth in passive AUM has come on the back of index accretion, as the Nifty and Sensex touched new lifetime highs, despite the uncertainty of elections and the spike in VIX. Like in the last 2 months, May 2024 also saw passive funds returning as the flavour.

THE BEST IS YET TO COME FOR PASSIVE FUNDS

It is hard to say, but it is a logic progression; and the experience of most countries has been that the big boost to AUM arises when there is a massive shift in favour of passive investing. Passive funds may have seen tepid inflows in recent months, but since March 2024, such flows have seen a sharp revival in investor interest. In India, the share of passives is much lower than the other countries, so we may have just scratched the surface. However, one must wait for the net impact of the names like Zerodha and Jio-Blackrock planning a pure passive-only approach in India. It eventually boils down to buying the entire haystack, rather than waster time trying to find a needle in a haystack.