Rising Popularity of Passive Funds; Why are Investors Embracing this Fund?
In the first seven months of this calendar year, new fund offers in the mutual fund industry have been coming in droves. As many as 106 new schemes have been floated in this period. Of these, 63 comprised passive mutual funds, against 51 launched in the whole of the previous year, data from Ace Equity MF shows.
Passive mutual funds have become increasingly attractive to investors, considering that the requirement for a fund manager should only be limited since these funds invest in a fashion aimed at closely tracking the returns of an underlying index. Since the large number of active mutual funds does not outperform their benchmark indices for a long period, what attracts investors mostly to these funds is their cheapness and simplicity.
Recent trends in the fund houses show increasing interest in thematic and sector-specific passive funds. Data from the Association of Mutual Funds in India shows that 25 thematic schemes and 31 index schemes have hit the market in the last seven months. In such a scenario, thematic funds will be considered for sectors like manufacturing, business cycles, and defence as a one-way rally and sectoral rotations continue to grip the market. Although the market looks overheated, such funds can provide an avenue for investors who want to diversify some part of their portfolio into select sectors.
Besides, not all passive fund categories are benchmarked to indices. Many new passive funds are designed to track a certain sector or theme, such as defence, consumer durables, or infrastructure. This kind of diversification helps meet the demand from investors seeking focused exposure without the complexity of active management.
Households increasingly find the simplicity and relative economy of passive funds more and more attractive as the difficulties in systematically capturing alpha through active funds become well recognized. Innovations in marketing passive funds have included sectoral and thematic funds that particularly attract investors, as well as Smart Beta funds that offer a prospect of outperforming traditional passive funds.
As many as 15 new funds hit the market in July alone this year, comprising six index funds and six ETFs, besides two thematic and one multi-cap fund. June and May, too, were busy months, with an appreciable number of launches indicative of continued investor interest.
This trend is all the more highlighted by the quarterly data. While 35 new schemes hit the market in the April-June quarter, 56 made their debut in the March quarter. This constant flow of new funds is partly to do with the fact that fund houses try to attract fresh investments with new schemes as inflows into existing schemes slow down.
However, some financial experts always advise against new NFOs because one does not have historical performance data on how reliable they are. They always recommend opting for established funds that can prove their performance through their track record. They argue that those existing funds that have a good history of performance are normally a better and safer investment option.
In all, the surge in passive mutual funds underlines a significant change in investor preference for low-cost and uncomplicated investment alternatives.
