As passive funds gain prominence in the Indian mutual fund industry, it is natural for investors and distributors to weigh the pros and cons of both investment styles and make an informed decision.
In this context, Cafemutual spoke to some leading voices in the Indian passive industry to understand whether the low cost of debt passive schemes makes them suitable to replace active debt funds in investor portfolios.
Arun Sundaresan, Head – ETF, Nippon India MF
Arun believes that passives are preferred by different investors for different reasons. He explains that some debt fund categories like target maturity and sectoral funds are only available in passive formats, while duration funds, money market funds and credit risk funds are unique to active debt funds. He concludes by saying that since both segments offer varied products and meet different investor needs, both can co-exist.
Deepak Yadav, Head – Passives, Aditya Birla Sun Life MF
Deepak feels that debt passive funds are still in their early stages of development in India. He explains that, as of now, the bulk of the passive debt industry comprises target maturity funds, offering limited options to investors. In contrast, globally, debt passives allow investors to take duration and credit risk, invest in perpetual funds and benefit from a wider variety of choices.
He believes that for Indian debt passives to match the global passive industry, they need to broaden their product bouquet, improve liquidity and see some regulatory changes. He hopes these developments will happen in the coming years.
Hemen Bhatia, ED and CEO, Angel One MF
Hemen believes that passive debt funds can replace active schemes in select categories of underlying securities. He points out that active funds currently offer greater flexibility in building corporate bond portfolios, as fund managers can select a broader range of securities — something challenging for passives, which are benchmark-driven. He adds that passive funds with government securities as underlying assets and liquid ETFs may serve as good alternatives to active funds. However, for corporate debt ETFs, it remains difficult for market makers to create units and manage pricing effectively. He concludes that both active and passive debt schemes can co-exist and the choice depends on the investor’s needs.
What do MFDs think?
Mumbai MFD Sandeep Barvarkar of SRS Financial Services feels that awareness about debt passives and passive funds in general, is still low among investors. He believes that active debt funds, where fund managers can create alpha at a relatively lower expense ratio, are more attractive than passive debt schemes in the debt space.
Anand MFD Sanjay Patel of Shree Hari Financial Services feels that debt passive funds are not very attractive for MFDs due to their FD-like returns.
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