In the developed countries, Mutual Fund (MF) Assets under Management (AUM) has raced past Bank deposits whereas the scenario in India is quite different where MF AUM is just one-fifths of the Bank Deposits. Investing could be in the form of Active investment where a Fund Manager actively manages the portfolio of a MF Scheme or Portfolio Management Scheme (PMS). Other form of investments is Passive Investment where services of Fund Manager are required just for re-balancing the portfolio in the same composition as that of a market index, which is dynamic in nature. Though Passive investing in India constitutes just around 4% of the MF AUM of about Rs 25 lakh crores, yet it has witnessed a four-fold growth in the last 3 years. Passive investing is made up of funds tracking market indices where human intervention is hardly required.
In the United States, it has now reached nearly half-way mark of the stock market capitalization as more & more investors shun stock-pickers and moving to index funds. Market share for passively managed equity and debt funds has risen to 45 percent, up 100 basis points from June 2018, according to data released by Bank of America Merrill Lynch. That follows a trend over the past decade in which investors have taken keen interest in indexing, particularly through exchange-traded funds (ETFs). About 10 years back, active investment had a nearly 3 to 1 ratio over passive investment in U.S. equity funds, according to Morningstar. That gap began to dwindle significantly in 2012 and has come down sharply when one takes a look at present position. Dr Micheal Burry, the man who predicted/anticipated global financial crisis says, the next stock market crisis is likely to be due to passive investment vehicles like Index ETFs. The liquidity is propping up all stocks irrespective of their fundamentals and earnings growth. He has compared growing stock and bond prices with collateralized debt obligations did for subprime mortgages more than 10 years ago. Like most bubbles, the longer it goes on, the worse the crash will be. In nutshell, incessant funds inflow in passive funds have swelled the index so much that they are far ahead of their fundamentals in years.
Coming back to India, passive funds just mimic the portfolio allocation of the bench mark index, and Fund manager has to keep re-balancing the portfolio, so as to keep it aligned to the benchmark index. Since there are no skills required in managing such passive funds, no stock-investment calls are required to be taken, thereby reducing the cost for investors that, in turn, enhances the return for the investors. In a market scenario, where active funds are finding it difficult to beat the bench mark, investors are flocking to the passively managed funds when we see Fund Houses launching more of passively managed funds. This shift of investors could be attributed to SEBI re-classification of large cap, mid cap and small cap categories, linking Total Expense Ratio (TER) to the corpus of the MF scheme, Indian equity markets maturing and enhanced coverage of equities.
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