Investors have shown an increased preference for index funds in the last year. The assets under management (AUM) of index funds that include both debt and equity schemes increased more than 100 percent to ₹1. 18 lakh crore from ₹42,880 crore a year ago, reported Economic Timesquoting the data from Association of mutual funds of India (AMFI).
During the same period, the number of new schemes in this fund category increased from 62 to 137 and the number of folios increased nearly 50 percent to 3. 079 million. Mutual fund AUM rose 6.8 percent in this period to ₹40.49 lakh crore.
Wealth advisors believe that index funds are preferred by many investors because of their simplicity, low expense and no fund manager bias.
“Index funds have low cost. Using these products one can participate in the wealth creation process without the need to worry about change in fund manager, change in constituents of actively managed portfolio,” says Kunal Valia, CIO, Listed Investments, Waterfield Advisors.
Index funds cost much less than an actively managed equity fund. A passive Nifty 50 index fund can cost you 6-20 basis points, while an actively managed fund could cost you 75-125 basis points in a direct plan.
For an investor, looking to invest upwards of 5 years, this could lead to significant cost savings.
Different kinds of index funds
Among the equity funds, investors have shown interest in broad based indices like the Nifty 50, Nifty Equal Weight 50, while some rich investors with an appetite for risk have also bought factor indices and some thematic index funds like auto, IT and pharma.
In the fixed income space, many rich investors and their family offices have invested in passive debt funds over the last one year, after the rise in bond yields, as they looked to lock into products that give predictable yields so that there is no volatility and constant monitoring of mark to market loss. This led to many target maturity fund launches with maturities across the entire yield curve.
Fund houses have launched a number of passive schemes where typically expense ratio has been less than 1 paisa for Bharat Bond ETF with other passive index funds having expense of around 15-25 paisa for direct plans and 25-50 basis points for regular plans.
“Investors like passive debt funds for their simplicity, low cost and most importantly predictability of returns,” says Radhika Gupta, CEO, Edelweiss Mutual Fund.