Passive investing gains momentum, but is this trend here to stay?

According to March 2023 data by the Association of Mutual Funds in India (AMFI), the total assets under management (AUM) of passive mutual funds grew by around 34 percent to Rs 6.97 lakh crore from Rs 5.21 lakh crore in March 2022. So, with the growing number of investors finding interest in passive funds, are passive funds the better bet compared to active funds? This was the topic of discussion at Cafemutual’s Confluence 2023, a recent mutual fund conference.

Also read: Why are more investors investing in passive funds?

Speaking at the panel discussion, Benedek Voros, Index Investment Strategy, S&P Dow Jones Index, said that in many parts of the broader market and many categories and subcategories, passive investments have increasingly been taking a higher market share.

According to Voros, S&P Global’s SPIVA research shows that there are a few drivers behind this phenomenon. One is fees. He explained that even if the cost of research is about 1 percent over 20 years, the amount spent is equal to paying away your entire capital. “It’s a very high hurdle rate for active managers,” he says. Another trend is the increasing professionalisation in the industry, a factor that investors take into account or should take into account because the higher the level of the playing field and the skill level of the average player, the harder it becomes for anyone who tries to beat the market to actually do so.

The third driver, he said, is the distribution of returns. “If you look at decades—multiple decades, one decade, two decades, or even more—what you see is that a small minority of index constituents drive the return of the index and the vast majority of stocks underperform the index itself. And that’s, again, something that makes picking individual stocks very challenging because the median stock, if you pick at random, is very likely to underperform overall,” Voras adds.

Quantum Mutual Fund’s Chirag Mehta still believes that being active is the way to go. The choice between active and passive, he says, depends on the maturity of the markets. Today, many inefficiencies still persist in the Indian market, which gives active fund managers an edge to perform over the long run.

“If you look at S&P Global’s SPIVA scorecards, a year ago, 90 percent of the active fund managers were underperforming the index. If you see now, it’s come down to 50 or 60 percent. And that is on the back of the broad rally that we have seen in equity markets, not led by just a few stocks,” Mehta said.

Also read: Six reasons why Quantum’s Chirag Mehta says this is the time to invest in smallcaps

So, given that there are no polarised rate weights or certain stocks driving the index, Mehta said this is the time when active can outperform passive. That is what has been seen incrementally over the last year, he pointed out.

As a fund house, Anupam Tiwari, Head of Equity at Groww Mutual Fund, said that they are looking at both active and passive funds, as in some segments or situations, passive funds may be more important to investors. But he added that in his last 20+ years of involvement in the stock market, he has not seen anyone who said that they would like to be 100 percent in passive funds. “Actually, it’s very difficult to do 100 percent passive, as we have not seen a 100 percent passive investment risk trade-off, as it is a very problematic risk view and a lot of people don’t appreciate it. So…we will leave it to advisers and investors to decide how interested they are and create our products based on that.”

Similarly, Scripbox’s founder and Chief Executive Officer (CEO), Atul Shinghal, said that whatever suits the requirements of their customers will guide them in creating the products.

“This active-passive debate has pretty much been around for 20 years or more. As distributors, our job is to take care of our customers’ returns,” he adds.

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