Even as passive investing continues to grow in popularity, its share in the mutual fund (MF) assets under management (AUM) is on the decline.
After tripling from 5.8% in April 2019 to 17.7% in March 2023, passive funds' share slipped to 16.6% by the end of 2024.
This decline has occurred despite record net inflows, investment account additions, and new fund launches last year.Experts attribute the slowdown in passive growth to a combination of unfavourable market conditions and shifting retail investment trends in the equity space, exacerbated by outflows from passive debt offerings.In the last two years, smallcap and midcap stocks have outperformed largecaps by a wide margin.Given that around 90% of the passive equity AUM tracks largecap indices such as the Nifty 50 and the Sensex, the mark-to-market gains for passive funds was much lower compared to active equity schemes.
In the two-year period ended December 2024, the Nifty 50 gained 31% while Nifty Smallcap 100 and Nifty Midcap 100 went up 93% and 82%, respectively.
Smallcap and midcap funds account for 24% of the active equity AUM. Additionally, schemes like flexicap and multicap also deploy a significant portion of their corpus in smallcap and midcap stocks.
Even active largecap funds invest up to 20% of their AUM in these stocks.
Secondly, the performance differential resulted in investors putting in record sums into active smallcap and midcap funds.
"While the outperformance of smallcap and midcap funds, and the subsequent surge in investor interest in these schemes has been a key factor, the strong inflows into thematic funds also aided the AUM share gain by active equity funds," said Vishal Dhawan, founder & CEO, Plan Ahead Wealth Advisors.
The double advantage resulted in active equity funds' share in the industry AUM surging to 46% in December 2024 from 39% in March 2023, shows data from the Association of Mutual Funds in India (Amfi).The declining trend in the passive AUM share is also a result of the change in debt fund taxation in April 2023.
The removal of indexation advantage dried up inflows into the fast-growing passive debt space, which had amassed over Rs 1.5 trillion within a span of a few years. The passive debt AUM, which stood at Rs 1.7 trillion in March 2023, has gone up only by 19% since then to Rs 2 trillion."A major reason for drop in passive AUM share seems to be passive debt funds with target maturity funds showing flat growth. This can be a result of outflows and lack of fresh offerings," said Sriram BKR, senior investment strategist, Geojit Financial Services.
However, passive equity funds have continued to garner higher inflows. Passive funds together raked in a net of Rs 1.3 trillion in 2024 compared to Rs 71,404 crore in 2023 propelled by record number of fund launches. The inflows have largely gone into passive equity funds.
The passive equity AUM surged 38% in the first 11 months of 2024 to Rs 8 trillion. In comparison, the active equity AUM went up by 39%.
The inflows into passive funds was supported by a record 130 fund launches. The spree of new offerings more than doubled the index fund investment accounts to 12.5 million.