Inflows from EPFO, new schemes drive passive funds' asset growth

Passive funds are gradually gaining market share within the mutual fund industry as a jump in allocations to retirement products, a slew of scheme launches, and lower costs are driving investors to these schemes.

The share of passive assets as a percentage of total assets under management has risen to 16% in July 2023 from 6% in July 2019, according to a Franklin Templeton Mutual Fund report.

While a large part of this growth has been driven by flows from the Employees' Provident Fund Organisation, which allows asset managers to invest in exchange-traded funds (ETFs), industry officials said several differentiated product launches have been in the passive space, sparking investor interest.


"The number of ideas that one can generate in the passive space is unlimited and differentiated, compared to the active space where there are restrictions due to categorisation norms," said Swarup Mohanty, chief executive officer of Mirae Asset Mutual Fund.

Following the capital market regulator Securities and Exchange Board of India's rules on the categorisation of mutual fund schemes in late 2017, asset managers have faced restrictions on scheme launches in the active fund space. For instance, a fund house can operate only one product in each category. Once the fund houses launch the schemes in these actively managed categories, they turned to thematic and passive funds where there are no such restrictions on scheme launches. A rise in the number of demat accounts is also leading to higher demand for ETFs.

Over the past three years, there have been a series of launches in the passive space such as Nifty 50 Manufacturing ETF, Nifty 200 Momentum 30 Fund, Nifty Midcap 150 Index Fund, Nifty Microcap 250 Index Fund, Digital ETF, Auto ETF, Silver ETF, Global Electric & Autonomous Vehicles ETF, ELSS Tax Saver Fund, Pharma ETF, Private Bank ETF, Nifty Midcap 50 Index Fund, S&P BSE Low Volatility Fund, S&P BSE Enhanced Value ETF, S&P BSE Financials ex-Bank 30 Index Fund and S&P BSE Quality Index Fund among others.

"As the investor base expands, many of them need simple products that are easy to understand, which is driving demand for passives," said Anand Vardarajan, business head at Tata Mutual Fund.

Passive funds are low-cost products that mimic an index. While financial planners recommend first-time investors to use simple passive funds like the Nifty ETF, Bharat Bond ETF and Gold ETF for their portfolios, savvier investors place bets on microcap funds, low volatility funds and thematic funds based on their understanding of the markets to make returns.