While passive mutual funds more than doubled their assets in the last three years, retail still accounts for a small portion of these funds’ assets, data showed. This, while they ramp up such investments at a faster pace than the national provident fund, high net-worth individuals (HNIs), and cash-rich corporates.
Since September 2022, assets under management (AUM) of passive mutual funds grew 2.3x to ₹12.99 trillion as of September. Of this, retail investors contributed 7.1%, up from 4.01% in September 2022, while HNI contribution grew from 11% to 17%. Meanwhile, the EPFO (Employees’ Provident Fund Organisation) and corporates together contributed 73% to the total passive AUM, against 84% three years ago.
In absolute terms, retail passive assets grew 4.9x, while HNI passive assets grew 4.3x, and corporate passive assets 2.2x. To be sure, the retail ramp-up comes on a low base.
Vishal Jain, chief executive officer, Zerodha Fund House, said, “Distributors and brokers have little incentive to promote passive products because they earn more by selling active funds—a trend seen globally—and brokers themselves prefer pushing more volatile instruments over exchange-traded funds (ETFs).”
With no real push from intermediaries, passive investing grows only when investors mature on their own and realize that stock picking or choosing from over a thousand active funds isn’t delivering results, Jain added.
A distributor gets more commissions in selling an active mutual fund scheme, as commissions, which are a part of the expense ratio, is higher in active schemes than passives. The maximum expense ratio an index fund can have is 1.5%. It is 2.25% for an active equity mutual fund scheme and 2% for active debt schemes.
Meanwhile, retail investors make up the majority of active funds’ assets. In active equity schemes, 51% of the AUM comes from retail investors. It is 15% in active hybrid schemes, and only 2% in debt schemes. Debt mutual funds are still led by corporates.
Jain of Zerodha added that in ETFs, the growth in retail investors gets overshadowed by one big mammoth investor—EPFO—but the growth can be visible in increasing retail folios.
“Over the last few years, we are seeing growth in folios by retail investors and with innovative products and increased awareness of low-cost beta products, the incremental share of non-institutional investors is increasing,” said Akhil Chaturvedi, executive director and chief business officer at Motilal Oswal AMC.
In the one year through September, passive fund folios have grown a bit faster at 32%, while active equity mutual fund folios have grown by 29%.
On the HNI share being higher in passives, Jimmy Patel, managing director at Quantum Mutual Fund, said that as people build wealth, they tend to take higher risks, and then their risk appetite naturally tapers.
“That’s exactly what has played out with HNIs and family offices: over time, many have shifted from high-risk alpha products to lower-risk passive options. Since they already have access to other high-return avenues—unlisted AIFs, angel investing, and other private-market deals—they consciously reserve their risk-taking for those areas, while using mutual funds largely for passive exposure,” Patel added.
In the last three years, the total passive funds, including ETFs and index funds, have grown and more than doubled to 626 as of September. The same number a year back was 307.
Passive funds like index funds and ETFs merely track the performance of an index. While their performance is mostly in line with the index, there may be some underperformance due to tracking errors.
On the contrary, the majority of active funds have underperformed their benchmarks in the last ten-year period. In the large-cap category, around 75% of active mutual fund schemes have underperformed the benchmark, as of June, according to an S&P Global report. In the small- and mid-cap category, around 80% of the active mutual fund schemes have underperformed the benchmark.