scorecardresearchInflow to index mutual funds, FoFs spikes in a shift towards passive funds

Inflow to index mutual funds, FoFs spikes in a shift towards passive funds

Updated: 13 Jul 2022, 01:29 PM IST
TL;DR.
While contribution to equity mutual funds dropped 16% in June, allocation to fund of funds and index funds rose significantly. We explore whether investors are increasingly getting inclined towards passive funds
Index funds witnessed a contribution of  <span class='webrupee'>₹</span>7,301 crore in June, an increase of 27 percent as compared to May.

Index funds witnessed a contribution of 7,301 crore in June, an increase of 27 percent as compared to May.

As markets continue to stay topsy-turvy, paranoia among mutual fund investors is understandable.

The contribution of equity mutual fund investors dropped by 16 percent to 15,497 crore in June. On the contrary, investors appear quite enthused with passive funds, particularly index mutual funds.

Overall, the category of index and ETFs saw an increase of 7 percent. And specifically, contribution to index funds jumped by 27 percent to 7,301 crore in June, as revealed by the AMFI (Association of Mutual Funds in India) data for the month of June.

Wealth advisors say index funds are sought after for their cost-effectiveness and consistent performance.

“Index funds are now a days preferable to mutual funds investors as they are cost effective, easy to understand and require least active management. If you see the historical data of post 6-7 years of large-cap funds, hardly few mutual funds have able to beat index return. Consistency in performance is also not seen there. All these factors push from active to passive. In long term, cost really matters so investment in index fund is advisable for long term investment,” says Preeti Zende, Founder of Apna Dhan Financial Services.

Asset class                                   Inflow ( crore) Change %
Equity:                                              15,497-16%
Index funds:                                 7,301   27%
Gold ETFs:                                                  135-33%
Other ETFs                                          5,35811%
FoFs overseas                                                 31528%

(Source: AMFI data for June 2022)

As we discern in the table above, equity mutual funds saw a drop in contributions in the month of June. On the other hand, index funds saw a contribution of 7,301 crore, an increase of 27 percent as compared to May. Fund of funds (overseas) saw a contribution of 315 crore, an increase of 28 percent over May data.

Exchange traded funds, apart from gold ETFs, saw a contribution of 5,358 crore, an increase of 11 percent. At the same time, gold ETFs saw a fall of 33 percent in June.

S Sridharan, founder and principal officer, Wealth Ladder Direct says there could be several reasons for the shift towards passive funds. These entail performance which is relatively better than their active counterparts.

“There is no basic outperformance in short term by active funds as compared to the index funds. The actively managed funds, particularly the ones confined to market capitalisation, say large cap funds, have little leeway to invest. However, there is no doubt that all kinds of funds have to bear market risk. When the market is down, almost everything will falls. While active funds fall by say 10 percent, the passive ones could decline by 7 percent — this is nothing but an outperformance,” he says.

First Published: 13 Jul 2022, 01:29 PM IST