Quarterly Passive Insights: How the Index Narrative grew in Q2FY25

14 Nov 2024 , 10:07 AM

Q2FY25 SHOWED INTEREST SUSTAINING IN PASSIVE FUNDS

After 2 quarters ending December 2023 and March 2024, when passive funds were out of focus, the quarter to June saw a revival in passive funds. That trend has been accentuated in the September 2024 quarter also. The report on quarterly passive insights has just been released by NSE and throws up some interesting insights. Actually, the reason for interest in passive funds is not hard to understand. You just need to look at the best performing funds over the last 1 year to appreciate this point. To compare apples with apples, we have only considered large caps funds multi-cap funds, flexi cap funds, index funds and ELSS funds.

Fund Name	Category	1-Year Returns	3-Year Returns	5-Year Returns
JM Flexi Cap Fund (G)	Flexi-Cap Fund	57.184%	27.794%	25.791%
SBI Long Term Equity Fund (G)	ELSS Fund	52.537%	24.878%	25.450%
Quanti Flexi Cap Fund (G)	Flexi-Cap Fund	47.988%	22.547%	33.328%
MOSL Nifty Small Cap Fund (G)	Index Fund	47.642%	23.842%	30.112%
BOI ELSS Tax Saver Fund (G)	ELSS Fund	47.360%	19.991%	26.719%
Quant Tax Plan (G)	ELSS Fund	44.186%	23.007%	33.599%
Nippon India Multi-Cap Fund (G)	Multi-Cap Fund	43.914%	27.281%	25.700%
MOSL Mid-Cap 150 Fund (G)	Index Fund	43.857%	22.974%	28.168%
Mahindra Manulife Multi-Cap	Multi-Cap Fund	42.479%	20.209%	26.783%
Invesco India Large Cap Fund	Large Cap Fund	40.388%	15.401%	19.760%

Data Source: Morningstar India

If you take the top-10 generic equity oriented funds on 1-year performance, there are 2 index funds featuring in the list; highlighting that passives have arrived as an asset class.

INDEX ETF QUARTERLY PROGRESS – SEPTEMBER 2024

The table below captures the gist of growth in index ETF AUM over the last few years; updated till September 2024 quarter. These are cumulative numbers.

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 Mar-24	5,63,176	96,163	31,224	4,642	6,95,205
Upto Sep-24 #	7,00,180	99,313	39,824	10,840	8,50,157

Data Source: NSE (# refers to 6-months period up to Q2FY25)

The above data gives a good historical perspective of how the various categories of ETFs have seen their AUMs grow.

• The numbers say it all. The AUM of index ETFs has grown from ₹50,211 Crore in Mar-17 to ₹8,50,157 Crore as of Sep-24. That is a 16.93X growth in 7.5 years. This translates into annual CAGR growth of 45.76%, which is impressive.
• While ETF AUMs are largely dominated by the equity ETFs, the growth story is interesting. In recent quarters, gold ETF AUM and even silver ETF AUM has grown at a rapid pace.
• As of September 2024, there were a total of 226 index ETFs in India, which comprised of 165 equity index ETFs, 32 debt index ETFs, 17 gold ETFs and 12 silver ETFs. There are a total of 81 different indices tracked including 66 equity indices and 15 debt indices.

In the last 7 years plus, the equity ETFs have led the way in terms of volumes. But there are new products like gold ETFs and silver ETFs also gaining traction, even as debt ETFs have tended to stagnate, in the absence of any clear index narrative.

INDEX FUNDS QUARTERLY PROGRESS – SEPTEMBER 2024

Unlike index ETFs, index funds are regular mutual funds that are based on day-end NAVs. Here is a quick look at the growth in AUM of index funds between Mar-17 and Sep-24.

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 Mar-24	1,03,577	1,09,995	–	2,13,572
Upto Sep-24 #	1,61,779	1,07,606	–	2,69,385

Data Source: NSE (# refers to 6-month period up to Q2FY25)

Here are some key takeaways from the index fund growth story for the latest quarter ended September 2024.

• The AUM of index funds has grown from ₹2,452 Crore in Mar-17 to ₹2,69,385 Crore as of September 2024. That is a 110-fold increase over 7.5 years, which is also due to the low base. The flows into index funds were not as intense as the flows into index ETFs, with the listing aspect working in favour of index ETFs.
• In contrast to the ETF story, debt index funds dominated the market share up to March 2024. However, the tables have turned in the last 2 quarters. The debt index fund story was entirely a post-pandemic phenomenon. The absence of SEBI restriction on number of index funds that an AMC can launch; has been a major positive factor.
• As of June 2024 close, there were a total of 242 index funds in India, which comprised of 153 equity index funds, 89 debt index funds. There are a total of 130 different indices being tracked by index funds, which include 56 equity indices and 74 debt indices.
• Out of the total index fund AUM, corporates account for a 43% of the overall index fund AUM, HNIs account for 40%, and retail investors account for just 17% of the AUM. The AUM share of banks and FPIs in the total index fund AUM was not significant.

Index funds have not shown the same enthusiasm as they started off with as many investors appear to have gravitated towards index ETFs due to listing simplicity and transparency. The real time prices of ETFs is also a much better proposition for shorter term passive traders.

SEPTEMBER 2024 UPDATE – FLOWS INTO INDEX ETFS AND INDEX FUNDS

We now take stock of how the flows into index funds and index ETFs panned out over the years in terms of gross and net flows; updated till September 2024. Gross flows reflect the participation levels and net flows reflect direction of flows. Let us start with index ETFs.

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
FY-2023-24	1,53,170	1,10,276	2,63,446	42,894
Upto Sep-24 #	1,03,269	61,437	1,64,706	41,832

Data Source: NSE (# refers to 6-months period up to Q2FY25)

Flows into and out of index ETFs tend to be volatile due to the predominance of corporate investors. Gross and net flows have been robust in Q2FY25. Let us turn to index fund flows.

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
FY-2023-24	52,950	37,261	90,211	15,689
Upto Sep-24 #	59,880	30,566	90,436	29,314

Data Source: NSE (# refers to 6-months period up to Q2FY25)

Thanks to the slew of NFOs of passive funds, the index funds have seen pick up in gross inflows in FY25, although this is just H1 data.

PASSIVE INVESTING IS STILL ON THE INVESTOR RADAR

In the aftermath of the pandemic, there had been a sea change in the attitude of investors. Combined with active managers struggling to beat the index, the result was a sharp spike in the demand for index ETFs and index funds. That trend may have slowed during the bull rally of 2023 and 2024, but things are changing for the better as now even retail investors are starting to look at passive funds and ETFs more seriously. At the end of the day, the story of passive funds was best captured by Jack Bogle, “Why look for a needle in a haystack, when  you can just buy the entire haystack.” That idea is surely catching on!