Explained | From Jio Financial to Zerodha, Indian asset managers go 'passive'

The shift from active to passive fund has resulted in seven fold surge in Assets Under Management (AUM) to Rs 7.81 lakh crore between July 2019 and July 2023.

India's asset managers are launching even more passive funds as an overcrowded market for active funds and their struggle to beat benchmark returns force a shift in the $558 billion (Rs 46.15 lakh crore) industry.

Moreover, passive funds, which replicate an index, are also cheaper for investors than active funds, whose composition is decided by a fund manager.

Fund houses have launched 23 passive funds so far this year, half the 45 launched in 2022 and well above 10 in 2019, data from Value Research shows.

And while the 40 new active funds so far this year equals 2022's total, it is less than the 60 launches in 2019.

One reason for the shift is the returns.

"The lower ability of active funds to consistently beat an applicable index, especially in the large-cap category, is one of the reasons for the spurt in passive funds," said Anil Ghelani, head of passive investments and products at DSP Asset Managers.

Between 2010 to May 2023, India's benchmark Sensex equity index, surged nearly 400 per cent, driving retail investor interest. But an active large-cap fund beat those returns by merely 0.3 per cent, on average, on a three-year rolling return basis, noted Ghelani.

The shift has resulted in passive funds' assets under management (AUM) surging seven-fold to Rs 7.81 lakh crore between July 2019 and July 2023.

More tellingly, passive funds now account for a bigger part of the industry pie -- jumping to 16.7 per cent from 6.4 per cent in four years, although that's well below the 47 per cent in the United States.

To be sure, besides being larger, the active funds industry is still drawing investors, particularly those investing via systematic investment plans.

But the entry of new, high-profile domestic players could accelerate the shift.

Mukesh Ambani's Jio Financial Services recently tied up with index funds powerhouse BlackRock Inc.

Zerodha, India's largest stockbroker, aims to offer only index-linked funds when it launches its fund house in the next 6-8 weeks.

The plan is to expand retail participation with products that are "simple, transparent and affordable," said Vishal Jain, CEO of Zerodha Fund House.

"We think index-based products exhibit these qualities in the most straightforward manner."

Investor fees for passive funds ranged from 0.08 per cent to 0.11 per cent in fiscal 2022 and between 1.88 per cent and 2 per cent for equity active funds, according to a paper published by the market regulator in May.

The regulator is also encouraging the shift. The Securities and Exchange Board of India (SEBI) has said it is working on liberal "light touch" regulations for passive funds.

That should help a crowded space.

"Majority of funds allowed as per ... rules on active side are already available with the larger fund houses, said Chintan Haria, head of investment strategy at ICICI Prudential, India's second-largest asset management company.

"The product gap in the passive space is much larger and hence we are seeing increased launches."