'Passive mutual funds are the right way to go for new retail investors': Sundeep Sikka

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Investing in equities directly is generally exciting for the investors, as they make stock selections based on their conviction and research. Mutual funds provide a convenient option for investors to enjoy similar investment exposure. However, stock selection and investment decisions are entrusted to professional fund managers. In contrast, passive investing trusts that the markets behave rationally, and the benchmark indices built upon the back-tested scientific methodologies generate the returns reflective of the market conditions. Such an investing strategy makes it easier for investors to understand portfolio performance as well. With several fresh retail investors boarding the investing journey during the current fiscal, passive investing is the right way to go for them.

Such schemes don’t allow the fund managers to make investment decisions except for implementing the changes in the benchmark indices. As such, the funds carry lower fund management charges, resulting in lower expense ratios as well. Since the scheme expenses are charged to the fund itself, lower expenses mean replicating the benchmark returns more closely. As such, passive funds emerge as a low-cost investment option for investors.

With the evolution of financial markets, passive funds are getting launched across different asset classes, different sectors and themes, smart investing indices, etc. While the investors could earlier have an option only in large cap indices and gold ETFs, they are now finding multiple options to make an investment decision. The investors can design their passive investment portfolio best suiting their risk appetite and investing preferences. Additionally, there are several FoFs (Fund of Funds) that are tracking international equity indices. As such, investors can also access international equities through such funds conveniently. The geographical diversification and hedge against currency depreciation add to the popularity of such funds.

The increasing convenience and low-cost advantage of such funds are aiding the investor inflow into such categories. Over the last two years, the AUM of Gold and other ETFs has grown multifold from 0.94 lakh crore in September 2018 to 2.19 lakh crore in September 2020 (source – Association of Mutual Funds in India). This reflects an encouraging trend among the investors towards passive investing. From 1,808 crore in September 2018, the AUM of FOFs investing overseas has also trebled to 6,497 crore as of 30th September 2020.

Mutual fund penetration continues to stay lower in India, with mutual fund AUM at around 11% of GDP as of 31st March 2020, even while it had increased from the levels of around 7% in March 2011. Such levels are significantly lower than in several other countries and lower than the global average of around 63%. However, the penetration levels are steadily increasing, with passive investing also sharing its contribution into the inflows. With the investing options increasing for the investors within the passive investing space, it may not be wrong to conclude that passive investing is here to stay. Not only this, it can be expected to be one of the significant contributors to the growth of the mutual fund industry in the coming years.

(The author is the ED and CEO, Nippon Life India Asset Management Limited. Views are his own.)

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