Are more mutual fund investors turning to passively managed funds?

Over the past few years the number of mutual fund investors in India has grown at a rapid pace. As a result, the assets under management of the MF industry have also expanded steadily, prompting almost all fund houses to launch new schemes. 

On the flip side, many actively managed schemes are struggling to meet the benchmark returns. This is prompting many investors to increasingly look at passively managed schemes, where the fund expenses and commissions are lower.

Now, the latest data released by the Association of Mutual Funds in India (AMFI) appears to show that more and more MF investors are turning to passive schemes. 

The ratio of active fund inflows to passive funds dropped to its lowest level in 18 months at 0.4 to one in August, compared with the last one-year average of 1.13:1, according to a report in The Economic Times, citing AMFI numbers.

The ratio of active to passive fund inflows has been moderating from a peak of 1.67 in January 2022, particularly in the last three months. The cumulative three-month inflow in passive funds, which includes index funds and exchange-traded funds (ETFs), stood at Rs 42,278 crore as of August end, while active funds had net inflow of Rs 30,515 crore during the same duration.

What more do the numbers say?

The AMFI numbers show that this is the first time since April 2021 when the cumulative three-month rolling inflow of passive funds is higher than active funds.

So, are Indian investors turning majorly towards index funds?

The numbers certainly show that they are. And a large part of this growth in index funds is coming from target maturity debt index funds, the numbers show.  

These schemes have a defined maturity and passively invest in high-quality government bonds or PSU bonds of a similar maturity constituting the fund's benchmark index. On maturity of the fund, investors are returned their investment proceeds. For funds maturing between 2026 and 2027, investors can earn pre-tax returns of close to 6.8-7% with the indexation benefits.

Financial planners said fixed income mutual fund investors are moving to target maturity funds as returns from their debt portfolio have been modest. In the past one year, many fixed income schemes - both short- and long-term categories - have returned 2-4% partly due to mark-to-market losses on account of a series of rate hikes by the central bank.

How has the AUM of passive funds risen?

According to the AMFI numbers, the AUM of equity passive funds rose to Rs 5.63 lakh crore in August 2022 at a rate of 56% annually in the past three years, while active equity funds' AUM grew at 29% annually to Rs 14.77 lakh crore during the period.