Active Fund NFOs Saw More Than Double Capital Inflows Than Passive Funds In 2022

Although the passively-managed mutual funds flood the market, mainly Exchange Traded Funds (ETFs), the asset under management (AUM) of active fund NFOs is more than double the passive funds.
Active Fund NFOs Saw More Than Double Capital In-Flows Than Passive Funds In 2022
Active Fund NFOs Saw More Than Double Capital In-Flows Than Passive Funds In 2022

The asset management companies (AMCs) are, of late, rolling out a flurry of new fund offers (NFOs) under index funds, exchange-traded funds (ETF), fund-of-funds, and even active funds.

Between January and September 2022, fund houses launched 77 NFOs in the active and passive equity mutual fund categories, offering investors various options with lucrative return schemes. Currently, at least five passively-managed equity mutual fund NFOs are open for subscription.

The benchmark NIFTY 50 Index has recently reclaimed the 18,000 mark, despite a turbulent time, overshadowed by skyrocketing inflation and the fear of a mild recession gripping the global market. This shows the Indian market has done relatively well compared to its counterpart in other economies.

Active Funds

A fund is considered an actively-managed equity mutual fund when a fund manager actively manages the fund by developing an investment strategy and seeks to generate higher returns for clients by aiming to outperform the underlying market benchmarks, such as NIFTY and Sensex.

So far this year, fund houses launched nine actively-managed mutual funds, collecting a total of Rs. 16,279 crores during the NFO window, more than double what passively-managed funds collected.

Active mutual funds continue to receive large capital inflows due to their ability to generate benchmark-beating returns with almost the same risk exposure.

The Passive Rush

The Securities and Exchange Board of India (Sebi), in 2017 circular, ruled that there can be only one mutual fund in one category by any mutual fund house. “It is desirable that different schemes launched by a mutual fund are clearly distinct in terms of asset allocation, investment strategy, etc.,” it said.

Thus, most fund houses have schemes in all mainstream categories like the large, mid, and small caps. Fund houses cannot keep two funds in the same category. It is due to this reason that the market has been flooded with passive mutual funds. Fund houses garner money in two ways: either by selling existing products or by launching new ones.

Fund houses, therefore, cannot have more than one scheme from the same category, and so, “they are now using the passive window to bring in quick money,” says a Mumbai-based distributor, requesting anonymity. He added that it benefits investors since they get innovative, low-cost investment products. But on the other hand, passive funds do not have an active fund manager to pick winning stocks. Instead, he simply has to mimic the securities of the underlying benchmark.

The Sweet Spot

Active funds are still the sweet spot as they bring more money to the table. This year, 65 passively-managed mutual funds were launched, collectively securing Rs. 7,914 crore during their NFOs, while the actively-managed mutual funds secured Rs. 16,279 crores.

Moreover, a retail investor can invest directly in an exchange-traded fund (ETF) through a Demat account, which may be one of the reasons for the low capital inflow. “Active funds bring in more money because they get a push from distributors, whereas ETFs are like (a) buffet for investors and whether they want to invest or not is their choice,” adds the distributor.

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