Passive mutual fund AUM grows by 22% in 6 months on new themes, strategies

Passive investing has been gaining popularity in the last couple of years. However, passive funds have officially made inroads into retail portfolios in 2022 as big mutual fund houses have started to prioritise passive investing and are coming up with varied themes and new investing strategies in the passive space. As a result, the assets managed by the passive funds has sky-rocketed in 2022 so far.

The assets under management or AUM of passive funds – including ETFs, index funds, gold ETFs and Fund of Funds – was at Rs 4.72 lakh crore as on December 31, 2021. The AUM was at Rs 5.71 lakh crore at the end of July, 2022- a 22% increase in 6 months. In comparison, debt mutual fund AUM decreased by 12%, and equity funds grew by 6% in the same period.

This trend has picked up pace after Sebi introduced revised norms for passive funds in May, 2022. The new rules allow the creation of a passive ELSS. The minimum subscription requirement for NFOs was also reduced for ETFs and index funds. In the same circular, Sebi also allowed re-balancing in passive funds and stipulated the maximum range of tracking errors that passive funds can work within. Many industry biggies predicted that the AUM in passive funds will shoot up because of these new rules.

According to mutual fund analysts, the popularity and swelling AUM of passive funds is in line with the global trend. “Over a period of time investors will broadly have three buckets to choose from- Passive funds, Quant Funds and Active Funds. While the active space is reasonably well covered from an Indian context, the passive and quant space is still in its early stages and will see a lot of varied offerings in the next few years. Based on their individual preferences, each investor can build portfolios across asset classes using these options,” says Arun Kumar, Head of mutual fund research at

Here’s how much passive fund garnered via NFOs month on month, in 2022:

Month Number of NFOs Funds mobilized by passive NFOs (Rs)
January 12 2,718 crore
February 15 1,394 crore
March 21 3,717 crore
April 2 110 crore
June NA NA
July 3 16 crore

Another reason for the big jump in passive fund AUM is the launch of several new schemes. Mutual fund houses are launching new schemes in the passive space for two reasons. Firstly, there are a lot of upcoming themes and secondly, there is no restriction of how many funds a fund house can launch in a particular segment. At the end of December, 2021, there were 225 passive funds in the Indian market. The number stands at 278 at the end of July, 2022. 53 new passive funds were launched by fund houses in 2022 so far.

Mutual fund advisors say that the growth in passive space is directly proportional to the growth of the entire market. They believe that as the market keeps growing and retail participation keeps increasing, it is going to be more and more difficult for active managers to outperform markets especially in large cap segments and in a 3-5 years span.

“There is a higher possibility of not having any information arbitrage. As fund managers try to offer index comparative returns, they do not take concentrated bets in any particular stock or sectors. It is a usual evolution process and the same has happened in developed markets as well. The passive funds will take more space in the coming time but that doesn’t mean active management is out of favor. There is scope for active managers over the long term as THE Indian indices are more diverse than developed markets. The positive aspect is that the growth of passive funds have made AMCs more innovative with offerings like smart beta, nifty next 50 fund etc. This is good for the investor,” says Raj Talati, Founder, AMB Investment, based in Vadodara.

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