A growing number of investors are now investing in passive funds.
From a market share of 1.4 per cent of assets under management (AUM) in 2015, they now account for over 17 per cent today, according to a new study by Motilal Oswal Asset Management Company (AMC).
For the study, Motilal Oswal AMC spoke to 2,000 investors from across India to get their insights on passive funds in India.
The findings reveal that 61 per cent of respondents had invested in at least one passive fund with 53 per cent confirming they had increased their allocation to passive funds in the last one year.
According to the survey, the primary reason for investing in passive funds were their low cost, simplicity, and market returns. About 57 per cent preferred them due to their low cost, 56 per cent because of the simplicity they offered, and 54 per cent because of their market returns
Findings further revealed that about 75 per cent of respondents preferred to invest through systematic investment plans (SIPs), while more than 80 per cent of respondents said they planned to hold their investments for more than three years. Also, 60 per cent of the respondents said they relied on social media for information on markets and investments with only 26 per cent following traditional news or media outlets for information related to investing.
There was a higher preference for social media in those that do not invest in passive funds, while the passive fund investors turned more towards newsletters and blogs online, the survey said.
Market Shift Towards Passive Funds
The mutual fund industry has also seen a major shift towards passive funds over the last five years, the survey found. At the end of FY-2018, the AUM of all passive funds put together stood at around Rs. 83,000 crore. It has grown to more than ₹7 lakh crore as of March 2023.
Navin Agarwal, managing director and CEO, Motilal Oswal AMC said: “The demand for passive investing has grown exponentially over the past few years, which reflects in AUM growth of 8.5x in last 5 years at a CAGR of 54 per cent.”
Pratik Oswal, head of passive funds, Motilal Oswal AMC said: “Passive funds are widely popular in the US and have over 50 per cent market share. We have started seeing similar trends in India over the last few years as well. With a market share of around 17 per cent, we believe that there is ample runway for passive funds ahead. This survey is a first of its kind in India and provides insights into how investors think about passive funds. It also helps shed some light on the thought process behind investment decisions of Indian investors.”
Investor Preferences for Allocations to Passive Funds
According to the survey, nearly half of those investing in passive funds allocated 10-30 per cent of their portfolio to passive funds. About 15 per cent also mentioned they had allocated 31-50 per cent in passive funds, while 12 per cent said that they allocated more than 50 per cent of their portfolio in passive funds.
About 28 per cent said they have allocated less than 10 per cent in passive funds.