Passive funds have suddenly become more active in recent times with the series of new fund launches by large fund houses, particularly before the expected entry of Mukesh Ambani-owned Jio Financial Services and the world’s largest index funds powerhouse, BlackRock Inc.
Passive funds are gaining investors confidence as most actively managed funds have trailed behind their benchmark indices. On the other hand, most recent passive NFOs have gained sharply due to run-up in key indices.
The industry has launched 63 new passive funds in the last seven months, which is much higher than the 51 launched in the whole of last year, according to Ace Equity MF data. Interestingly, half of the 12 NFOs launched this month were in passive mode.
Among large fund houses, Tata Mutual Fund launched 10 new passive funds by July-end, followed by HDFC AMC with five, and Mirae Asset Management and ICICI Prudential with four each, among others.
The number of folios under passive funds grew 22 per cent last month to 3.22 crore, up from 2.64 crore logged in January. However, in the same period, active fund folios were up 19 per cent at 13.84 crore (11.64 crore). The asset under management of passive funds jumped 24 per cent to ₹10.95 lakh crore (₹8.83 lakh crore).
Kaustubh Belapurkar, Director of Morningstar Investment Research India said most large AMCs rely on passive and thematic NFOs as their active product bouquet is already established.
“Passive funds that focus on a particular sector/theme or factor typically carry greater concentration, sector or factor risk,” he added.
Strategy to attract investors
The new passive funds launched have adopted innovative strategies to bridge the gap between passive and active funds. While alpha is typically associated with actively managed funds, smart beta strategies extend the concept to passive funds..
Unlike traditional passive funds, which replicate an underlying index without attempting to outperform the market, Smart Beta funds are based on indices designed to potentially beat the market.
Among many passive strategies, equal weight investment in an index has caught investors’ attention, while the narrow theme of investing in the top-10 stocks of the Nifty index to generate risk-free higher returns has also emerged as a popular theme.
Trivesh, COO of Tradejini, said exchange-traded funds that use equal-weight or smart beta strategies do carry higher risks due to more frequent churning, even as they can potentially deliver higher returns by capturing specific market opportunities.
“The trade-off here is between higher reward potential and increased risk. These complexities make it crucial for investors to fully understand the nature of these ETFs and align them with their risk tolerance,” he said.
