Passive funds are fast gaining popularity among institutional and high networth investors. Funds with no active role of a manager such as index and exchange-traded funds formed 47% of the total equity funds inflow in the 12 months to June 2020 compared with a share of just around 15.2% two years ago.
The passive funds reported ₹67,419 crore of inflow while the total equity fund flow including active and passive funds was ₹1.4 lakh crore during the year ended June 2020. The total AUM of index and ETF funds stood at ₹1.86 lakh crore at end of June 2020, out of which over 92% was backed by equity assets.
Managers and distributors cite two key reasons for this trend. One is the increasing inflows from Employees’ Provident Fund Organisation. Since 2015, EPFO can invest up to 15% of their incremental flows in equities through the ETF route. According to some distributors, the assets under management of the SBI Nifty 50 and SBI ETF Sensex schemes expanded mainly due to inflows from EPFO.
The lower expense ratio of ETFs is another reason for their popularity. Given the lower expenses, the top-10 passive funds performed relatively better with a drop of 11.5% in their AUM compared with a 13% drop in the AUM of the top-10 large-cap funds over the past 12 months.
Online brokerage platforms introduced innovative instruments to promote ETFs, which also helped in improving the inflows.
Passive funds reported inflow of ₹4,206 crore in June while active funds’ inflow was at a four-year low of ₹240 crore.