The Rise Of Passive Funds

The popularity of passive funds among retail investors has risen post Covid, and fund houses are out with many variations of ETFs and index funds. Does this category present a new opportunity for investors?

- Kundan Kishore

Over the last 5-10 years, passive funds have surged in size and popularity in India as Well as in the international markets like the US. In the US, the assets in passive funds has grown four times in the past decade from $3.2 trillion at the end of 2013 to $15 trillion at the end of 2023. Says Anil Ghelani, CFA, head - passive income and products, DSP Mutual Fund: "With passive funds witnessing positive flows consistently over the past decade, for the first time in history of the US mutual fund industry, the assets under management (AUM) of passive funds has crossed that of active funds."

In India, the share of passive funds' AUM has doubled from 8 per cent of the mutual fund industry AUM in August 2020 to 16 per cent in August 2024. In just one year, as of August 2024, the AUM of passive funds has increased from ₹7.58 trillion to ₹10.96 trillion, a growth of 45 per cent. In the last three years, passive funds got a higher net inflow compared to active funds in the large-cap category. According to experts, this trend is likely to continue.

"While in some global markets like the US, we have already seen passive funds taking over in size; in India we are seeing a gradual growth. In my view, together with growth in the overall industry, we will see this (passive funds') proportion increase to 25 per cent in the next 3-5 years," says Ghelani.

This evolving scenario gives rise to the question: are passive funds outperforming active management, or are they creating a more competitive and cost-effective option that ultimately benefits the investors?

The Turning Point

Historically, passive funds were closely linked to index investing, primarily focused on replicating the performance of broad equity indices,such as the Nifty and the Sensex.