Passive funds make more sense in your core mutual fund portfolio

Mutual fund managers and experts believe that passive funds make more sense in the core portfolio of mutual fund investors in India now, said fund managers at the Cafe Mutual Passives Conference in Mumbai. Large cap schemes have been failing to beat the benchmark in the last three years. According to data, mid cap schemes have also started to tread on the same path. Fund managers believe that mutual fund investors should think seriously about passive funds and add them to their portfolio.

Indian passive AUM has grown from Rs 52,368 cr in March. 2017 to Rs 499,319 crore in March 2022. Which means a growth rate of 57%, according to AMFI.

Koel Ghosh, Head of South Asia, S&P Dow Jones Indices, said that large cap as a segment has reached its efficiency. It started underperforming indices long back, but now slowly we are seeing the same trend starting in the mid cap segment as well. In the USA the persistence of a fund manager to beat the index is only 27%. Index has predictability, so in the longer term, you are not falling into the fund manager bias also.

Navneet Munot, CEO, Mutual Fund, said that the fund house has been going big on passive investments, but he believes that actives can not be replaced by passive funds. “Rise of ETFs, algo trading etc have created massive opportunity for active managers as well. We have launched many passive funds last year and we are launching more this year. But we believe that Indian investors need both at the moment,” said Navneet Munot.

Swarup Mohanty, CEO, Mirae Asset Mutual Fund, says that Mirae Asset as a fund house has been aggressive on ETFs in the last couple of years. He also believes that even though both ETFs and index funds are important for investors, the fund house is focusing more on ETFs. “We have chosen the ETF over index funds because it is closer to the market. There are many investors who want to start with a diversified portfolio, they would buy the market and then move to active where the risk might be more. Some of them might not even want to go active. Another part is that active funds have restrictions of one scheme per category. Hence there is an edge in passive space. Wherever there is a possibility, you can have new innovative products. Hence it makes sense to give it importance. Today we are looking at the last 10 year which says maximum large caps underperformed. You don’t want to wait and invest till the time when the data shows that we have been investing for 10 years and 1 in 2 mid cap funds underperformed. 10 years down the line it would be done,” said Swarup Mohanty.

The experts also spoke about the viability of constantly beating the benchmark for longer periods. Sameer Desai, National lead, ETF retail, Nippon India Mutual Fund said that it is not mathematically possible for all schemes to constantly beat the market. “Large cap mutual funds are failing to generate alpha. Hence your core portfolio should be in passive if you are a long term investor. In a long term, if you outperform 4 times, you will underperform also. So, buying an index or going for a smart beta is a smart solution. Asset allocation as a principle can only be done efficiently with passive funds only. If you are buying a chunk of an index, it does not represent an asset class,” says Sameer Desai.


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