INSUBCONTINENT EXCLUSIVE:
Passive products now account for nearly a quarter of equity assets under management.India's $442 billion asset management industry is
finally having to reckon with the passive investing juggernaut.After decades of sluggish growth, the number of accounts invested in
index-tracking or exchange-traded funds more than doubled to 5.6 million in the year to April
Passive products now account for nearly a quarter of equity assets under management versus about 16% two years ago, data from the
Association of Mutual Funds in India show
That compares to more than 50% in the U.S.The foundations for the boom were laid by a series of regulatory changes preventing active fund
managers from gaming the league tables
What supercharged it was the Covid-19 pandemic which, like elsewhere, stoked a retail investing surge that's seen millions of new young day
traders pile into Indian equities via online apps
Their interest is now spilling over into ETFs, creating an opening for an up-and-coming asset manager to become India's own Vanguard.Zerodha
Broking Ltd., a Robinhood-like operator that's become India's biggest broker, is awaiting regulatory approval for an asset management
company that will focus only on passive investing.The purpose is to "offer a simple-to-understand product to first-time investors," said
Nithin Kamath, chief executive officer at Zerodha
"Like how Vanguard's retirement fund in the US made it simpler to invest."Malvern, Pennsylvania-based Vanguard is best known for the
passively managed index-tracking funds pioneered by founder John Bogle
It has no plans to enter the Indian market at this time, a spokesperson said.Passive FocusWith well-entrenched domestic players, India has
historically been a tough market for the big global asset managers, and some of them have exited the local industry after wracking up losses
The likes of Fidelity International and Goldman Sachs Group Inc
have sold the Indian units of their fund-management businesses in the past decade."In India, while people have launched passive investment
products, the focus hasn't been passive as most of the revenue is generated from active funds," Kamath said
"We feel there is an opportunity for passive-only asset management company in the country."Angel Broking Ltd., which also runs a low-cost
stock trading platform, also plans to foray into the asset management business by floating a mutual fund focused on tech-based passive
investment products.The aspirants hope to rapidly accumulate scale in the ETF market in the same way that their low-cost and often free
services -- together with accessible online platforms -- helped them upend India's stock-broking industry.Like elsewhere in the world, one
of the main drivers of the rush to passive funds is cost
Fees for index funds in India are typically around 0.1-0.2%, while for actively managed funds that can be 1-1.5% of assets.20-Year
Wait"These are very exciting times, something that I have waited for for nearly 20 years," said Vishal Jain, head of ETFs at Nippon Life
India Asset Management Ltd., who was chief investment officer at India's first passive investment fund back in 2001
In March 2020, he had 1 million clients invested in ETFs
"What had taken 19 years between 2001 and 2020, we did in just the last one year."The rapid development in ETF investments is also owing to
regulatory reforms.In 2017, the Securities and Exchange Board of India acted to prevent money managers from loading large-cap funds with
mid- or small-cap stocks in a bid to generate better returns than their benchmarks
The following year, authorities mandated performance to be disclosed against the total return index of the corresponding benchmark, as
opposed to the price index which didn't include dividends.Together, these reforms made the underperformance of active funds suddenly much
more visible to ordinary investors
The S-P BSE 100 Index, a gauge of India's big companies, beat 100% of actively-managed large-cap equity mutual funds in the second half of
2020, according to the data from S-P Dow Jones Indices."It's now reached a tipping point," said Anish Teli, managing partner at QED Capital
Advisors LLP in Mumbai, an investment firm catering to high-net worth individuals which offers both active and passive options
"The regulator's measures were a catalyst in bringing the advantages of passive investing out more starkly."(This story has not been edited
by TheIndianSubcontinent staff and is auto-generated from a syndicated feed.)
