Mutual funds launching series of passive NFOs in debt and equity

Mutual funds are launching a series of new passive funds, which enables them to expand their product basket with low-cost innovations while also marketing it as a fund-of-fund asset allocation solution for do-it-yourself investors.

As many as eight new fund offers (NFO) are lined up in the passive space this month.

In the equity space, there are two from Aditya Birla Sun Life Mutual Fund — Nifty Midcap 150 Index Fund and Nifty Smallcap 50 Index Fund — while Axis Mutual Fund has an IT exchange-traded fund (ETF).


On the debt side, the NFO of Edelweiss Nifty PSU Bond Plus SDL Index Fund 2026 closed this week while others that are open include other target maturity gilt funds such as IDFC’s Gilt 2027 Index Fund and Gilt 2028 Index Fund and Nippon India Nifty SDL 2026 Maturity ETF.

“Having a bouquet of passive products will help them bundle it as a fund-of-fund (FOF) and offer it as an asset allocation solution to investors who do not have an advisor,” says Kaustubh Belapurkar, director-fund research at Morningstar India.

Belapurkar believes that NFOs help in offering a broader range of products to investors and as they build a track record and situations change, investors interest could come into these products.

Recently Motilal Oswal AMC through its Multi-Asset Passive Fund of Fund offered one such asset allocation solution. The fund invests in a mix of passive funds namely Motilal Oswal Nifty 500 Fund, Motilal Oswal S&P 500 Fund, Motilal Oswal 5-year GSec ETF and ICICI Prudential Gold ETF to offer an asset allocation solution.

Increasingly in the equity space, investors have been moving to passive funds as a large chunk of active funds have been unable to outperform benchmarks.
As per a report by SPIVA India, over longer horizons, the majority of the actively managed large-cap equity funds in India underperformed the large-cap benchmark, with 67.67% of large-cap funds underperforming over the 10 years ending June 2020.

Over the last couple of years, investors have shied away from debt funds as they have been worried about the quality of paper in the portfolio. There have been defaults by IL&FS and DHFL on their bonds while Franklin Templeton shuttered six schemes due to poor liquidity resulting from the Covid-19 pandemic, which has lowered investor appetite.

Financial planners believe passive funds where portfolios are transparent can bring back investors. “Passive funds in the debt space give you transparency, liquidity and low cost,” said Radhika Gupta, CEO, Edelweiss MF.

Low-cost funds add to returns as well. For high-cost debt funds where the expense ratio is 150 basis points, even if the fund gives a pre-tax return of 6%, post-expense yields are 4.5% as expenses take away as much as 25% of your returns.