Do you want to learn how to begin passive investing? Here’s everything you need to know about passive investing, including its definition, tactics, and who should invest in it.
According to a recent SPIVA survey, more than 80% of large-cap active funds failed to outperform the S&P BSE 100 Index (based on data as of 30th June 2021). One of the most compelling reasons why individuals are increasingly choosing index funds over active funds is the aforementioned figure. As a result, the number of folios and AUM in passive funds has increased dramatically. The emergence of passive investing in India is the subject of this blog.
More than 80% of large-cap active funds have failed to outperform the S&P BSE 100 Index across one, three, and five years, as seen in the table above. The same can be said for ELSS funds, with more than half of active funds underperforming the S&P BSE 200 Index. On a one-year and five-year basis, more than half of active funds underperformed the S&P BSE 400 MidSmallCap Index in the mid and small-cap space.
Due to active funds’ above-average underperformance, investors may wonder if paying high fund management fees in the form of a high expense ratio for these active mutual funds is worthwhile. Is it therefore preferable to switch to passive investing? The number of people who are passive is increasing.
What are Index Funds and How Do They Work?
An index fund is an open-ended investment vehicle that invests in all of the index’s constituents based on their weighting in the index. A Nifty 50 Index Fund, for example, invests in all 50 constituents of the Nifty 50 Index in proportion to their weighting in the index. A passive fund is also known as an index fund. An index fund is a type of mutual fund that mimics or copies the performance of a benchmark index.
Investors can purchase index funds based on a variety of indices, including:
- Nifty 50 Index is a stock market index that measures the performance of
- Nifty Next 50 Index is a stock market index that tracks the performance of the
- The Nifty 100 Index is a stock market index that measures the performance
- Nifty Midcap 150 Index is a stock market index that measures the performance of small and
- The Nifty Smallcap 250 Index is a stock market index that tracks the performance of small
- The Nifty 500 Index, for example.
Investing in index funds is beneficial for the following reasons:
- Investors that are satisfied with market risk and returns rather than taking a higher risk and exceeding the markets.
- Investors that choose to invest at a cheap cost rather than in active funds with higher fee ratios.
- Investors who desire to invest in all of an index’s constituents but avoiding fund manager bias on which companies to buy, how much to buy, when to buy, and at what price. The same can be said about fund manager selling bias.
- Investors seeking a diverse investment portfolio, such as those provided by wide market indices.
Growth in Assets Under Management: Passive Investing (AUM)
Let’s have a look at how index funds have performed in India over the last several years now that we know what they are and who should invest in them.
Passive schemes presently have an AUM of Rs. 4.6 lakh crores, accounting for 11.8 percent of the total mutual fund industry’s AUM. The AUM of passive investment was barely Rs. 50,000 crores five years ago, in March 2017. AUM has increased by more than ninefold to Rs. 4.6 lakh crores. Similarly, passive investing accounted for only 2.8 percent of total mutual fund AUM five years ago, but it now accounts for 11.8 percent. AUM has grown by 56 percent year over year (since January 2021).
Index funds, gold exchange-traded funds (ETFs), and other ETFs make up passive investment AUM (equity and debt). Index funds’ AUM increased threefold in the last year, gold ETFs gained 2.5 percent, and other ETFs grew 49 percent. As a result, index funds have outperformed gold ETFs and other ETFs in the recent year.
Increase in the number of passive client folios
We saw in the last section how the AUM of passive investment has exploded in recent years. The increase is due to an increase in the number of people who choose passive investing to active investing. So, let’s take a look at how passive customer folios are growing.
The number of passive customer folios has increased to 12 crores, accounting for 12% of all mutual fund customer folios. The number of passive client folios was barely 5.5 crores five years ago, in March 2017. The number of folios held by passive customers has more than doubled to 12 crores. Similarly, passive customer folios made up only 2% of the whole mutual fund industry folios five years ago, but they have already increased to 12%. The increase in passive client folios year over year (starting January 2021) is a whopping 167 percent.
The number of customer folios in the passive investing category is increasing.
In the last section, we observed how the total passive investment category has grown. Let’s take a look at the rise of passive investing by segment.
Portfolios of passive investments are broken down into segments.
On a month-to-month basis, passive client folios increased by 5.8%, while mutual fund industry folios increased by 1.5 percent. The following is the year-over-year rise in passive customer folios:
- The folios of index funds increased by 144 percent year over year.
- The folios of gold ETFs increased by 250 percent year over year.
- Other ETF folios (equity and debt) grew by 147 percent year over year.
The increase in the number of passive schemes and the availability of more investment options for customers has resulted in an increase in the number of customer folios and AUM for passive investing. There are 196 of them as of January 2022.
Smart beta indices are a hybrid of active and passive investment strategies.
In recent years, the NSE has begun to offer a variety of factor-based indices. These indices combine active and passive investment strategies:
They have the potential to outperform broad market capitalization indices (for example, the Nifty 50 Index), as large-cap active funds are expected to do.
They, like passive funds, have a low expense ratio.
These smart beta indexes, as well as the passive schemes based on them, include:
Smart beta indices are a hybrid of active and passive investment strategies.
ICICI AMC ETF and Index Fund for the Nifty 100 Low Volatility 30 Index
UTI and Motilal Oswal AMC ETF and Index Fund for the Nifty 200 Momentum 30 Index
ICICI AMC Nifty Alpha Low Volatility 30 Index
Index funds’ performance
We learned about numerous indices, investment options, AUM growth, customer portfolios, and other topics in the previous sections. Let’s take a look at the performance of index funds.
In India, passive investment has a long way to go
In several industrialised economies, such as the United States and Japan, the percentage of passive funds is either close to or has already surpassed that of active funds. Passive funds account for 12% of the whole mutual fund sector in India. However, in recent years, passive funds have outperformed active funds in terms of yearly growth.
Broad market capitalisation index funds, sectoral index funds, and smart beta and index funds have all been launched by fund houses. Investors can also invest in gold s, debt, and debt index funds in addition to stock s and index funds. With so many index and index funds to select from, passive investing in India will continue to develop at a quicker rate in the near future.
Using the Glide Invest App to invest in index funds
Broad market capitalisation index funds, sectoral index funds, and smart betaand index funds have all been launched by fund houses. Investors can also invest in gold debt, and debt index funds in addition to stock s and index funds. There are many index and index funds to choose from.
You’ll get advice from Glide Invest on:
An evaluation of your personal risk profile
Defining your financial objectives
Asset allocation that is appropriate
Creating a financial strategy for each objective
Automating the budgeting process
Your financial plan will be examined and analysed.
You will be held in my arms till your financial objectives are met.