Demand for passive funds grow with asset under management rising 8.5x in 5 years: Motilal Oswal

Passive funds have taken centre-stage in India over the last few years, gaining market share from 1.4 percent of asset under management (AUM) in 2015 to over 17 percent till date, said Motilal Oswal Asset Management Company (MOAMC) report. The company recently conducted a survey with more than 2,000 investors participating from across the country to understand the usage and attitude of investors towards passive funds in India.

Speaking on the study, Navin Agarwal, MD & CEO, Motilal Oswal Asset Management Company Ltd. 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 percent."

Pratik Oswal, Head of Passive Funds, Motilal Oswal Asset Management Company Ltd said, “Passive funds are widely popular in the US and have over 50 percent market share. We have started seeing similar trends in India over the last few years as well. With a market share of around 17 percent, we believe that there is ample runway for passive funds ahead."

According to the findings of the survey, 61 percent of investors have invested in at least 1 passive fund, underscoring the fast-growing adoption of passive funds in India. Revealing the reason investors choose to invest in passive funds, the survey findings point out the fact that 57 percent of respondents prefer these funds due to their low-cost nature as the biggest reason, followed by 56 percent of respondents who feel that the simplicity of these funds is what pulls them to invest in them, and more than 54 percent investors do so for the fact that they tend to deliver market returns.

The mutual fund industry has seen a major shift towards passive funds over the last five years. 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 Rs 7,00,000 crore as of March 2023, rising 8.5x in just 5 years at a CAGR of 54 percent.

The survey findings came out with patterns in investor preferences in terms of allocation. Nearly half of those investing in passive funds allocate 10-30 percent of their portfolio to passive funds, reveals survey findings. About 15 percent of investors mentioned that they have allocated 31-50 percent in passive funds, while 12 percent said that they allocated more than 50 percent of their portfolio in passive funds. On the other hand, 28 percent of investors have a less than 10 percent allocation to passive funds.

According to the findings of the survey, investors seem to have a preference between Index Funds and ETFs with 87 percent of respondents investing via Index Funds vs just 41 percent investing via ETFs. According to the fund house, this is because ETFs are bought and sold on the stock exchanges and require the investor to have a demat account. On the other hand, investing in Index Funds has no such requirement and is comparatively straightforward similar to any other mutual fund transaction.

More than 75 percent of respondents said that they preferred to invest regularly every month using SIPs, while only 42 percent said that they leaned towards lumpsum investment. The preference for SIPs was equally strong among those who invest in passive funds and those who do not.

This universal preference for SIPs shows that they are simple, yet very effective in long-term wealth creation. The more disciplined approach to investing has also proven to be a great way to tide over market volatility, allowing investors to cut through the noise. As of March 2023, monthly SIP inflows crossed the Rs 14,000 crore mark for the first time, staying above the Rs 10,000 crore mark for 19 months straight.

The survey also reveals that more than 60 percent of respondents get information on markets and investments from Social Media platforms like Twitter, Instagram, etc. On the other hand, only around 26 percent follow traditional news/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 investment landscape in India is evolving rapidly, more than 80 percent of respondents said that they were planning to hold their investments for more than 3 years, while 16 percent planned to hold for 1-3 years. Only 3 percent of investors said that they were looking to liquidate their investments in less than a year.