ETMGS 2021: Passive funds gaining traction, but active ones here to stay, say industry captains

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NEW DELHI: Passive funds are gaining traction, but fund managers believe active and passive funds are going to co-exist in the Indian market.

It’s not active or passive, but active and passive, say industry captains. “While passive funds are simple and convenient, active fund managers with skills and temperament would keep delivering alpha, going forward,” they argued at the
ETMarkets Global Summit 2021.

“Passive funds are popular because of simplicity and convenience. Specific to India, there are just 300-400 stocks, which are worth buying. But to buy those companies, we have some 3,000 equity funds. I find a lot of investors having 20-30 different schemes in their portfolios. Eventually, investors are buying the market,” said Aashish Somaiyaa, CEO at White Oak Capital Management.

The virtual event, which kicked off on Wednesday on
www.etmarkets.com, runs through January 22. The session was moderated by Madhu Kela of MK Ventures.

Koel Ghosh, Head of South Asia S&P Dow Jones Indices & CEO at Asia Index Private, said 80 per cent of active fund managers have underperformed their benchmarks over three-year and five-year periods, but felt active funds have an edge in the smallcap and midcap space.

“In the MF industry, you see a number of themes, and an investor gets confused on how to filter through them,” she said, adding that “it is not active or passive, but active and passive: one could be a core part of your portfolio, and the other can be the satellite,” she said.

Kalpen Parekh, President at DSP Mutual Fund, said the choice of passive funds is more institutional in nature. “If Rs 2 lakh crore is the passive funds’ assets under management, almost Rs 1.7-1.8 lakh crore of that is still institutional, EPFO money. Young money, digital money and people who want simplicity are choosing passive funds as their first choice. Consumers are also very wise to note that since the last 5-10 years, most of the known mutual funds have not beaten the market in terms of return,” Parekh said.

Ben Johnson, Director of Global ETF and Passive Strategies Research at Morningstar, said low cost active funds have more chances of succeeding for the average investor.

Parekh said he is from the camp, which thinks alpha is fleeting and is not permanent. He said he tries to keep both active and passive funds in his own portfolio.

“Nowadays, there are a lot of investors who are digital first and DIY. If you are just entering the industry, if you don’t know what to buy, the least you can do is buy the market. The scope for passive is actually because of simplicity and ease of execution. It is very good for novices and first timers,” said Somaiyaa.

According to Koel Ghosh, sustainable companies are generating good returns and the phenomena to invest in ESG compliant businesses is also coming to India. “In the next 5-10 years, passive is going to take a quantum leap. But will it eat into the market shares of active funds? It will depend on various factors,” she said.

Somaiyaa said he does not think there is a lack of scope for generating alpha in India, but added that he never set up a passive fund when he was at Motilal Oswal, thinking there will be no alpha. “My every single rupee is under active management,” he said.

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