The share of exchange traded funds (ETFs) and Index funds in the industry rose to about 16.5% in March 2023 from 6% in June 2019.
Meanwhile, the assets under management (AUM) of active equity schemes grew at a CAGR of 17%.
Cumulatively over the past four years, inflows in ETFs and Index funds have been to the tune `3.9 trillion, in line with the inflows in the active equity schemes, a report by Motilal Oswal Financial Services said.
“Passive investments are comparatively more attractive than active investments owing to their ease of investing, better liquidity and lower cost. In terms of returns, our analysis shows that the 1-year, 3-year and 5-year returns for large cap active equity schemes and ETFs are not materially different,” the report said.
In FY23, net inflows in passive schemes stood at `1.55 trillion compared with overall net inflows of `763 billion for the MF industry.
However, the flows are predominantly from the Employees’ Provident Fund Organisation (EPFO) and high net worth individuals (HNIs).
Retail investors have largely stayed away from passive investments as a large portion (75%) of retail assets are garnered from the distributor channel.
Registered investment advisors (RIAs) earn negligible fee in selling ETFs, whereas in equity schemes, commission rates are upwards of 80 basis points, the brokerage said.
The EPFO had invested Rs 1.6 trillion in ETFs till March 2022 and had a 56% share of their overall AUM. A major boost to the ETF market came in 2015 when the EPFO started investing in the stock market through the ETF route. Initially, it was 5% of incremental flows and the same was subsequently hiked to 15% in 2017.
The corporate ETF AUM is dominated by T30 cities, accounting for 99% share. Within T30 cities, more than 70% of the corporate AUM is through direct channels.
As of FY23, corporate ETF AUM is dominated by SBI AMC with 51% share and UTI AMC with 14% as they manage EPFO investments into ETFs. Edelweiss and Nippon are other important players in the segment with 11% and 10% share, respectively.
HNIs have seen their ETF assets increasing at a CAGR of 73% over FY19-23 to `340 billion. The HNI share in ETF AUM has risen to 6% in FY23 from 3% in FY19. The ETF AUM per folio for HNIs is more than 2x their AUM per folio in the equity segment.
Retail investments into ETF saw 56% growth over the past four years to `97 billion in FY23. But the share of ETFs in total retail AUM stands at just about 1%. Also, the AUM per folio is less than one-tenth the exposure to equity schemes.
HNIs have seen an asset growth of 145% in index funds over the past four years. Index funds’ AUM in the HNI segment is 1.9x that of ETF AUM.
The AUM per folio in this segment at `2.3 million is higher than ETFs and the number of folios is 4% of the equity fund folios.
The retail segment too has seen an asset growth of 82% in index funds over the past four years and is at 1.8x the AUM in the ETF segment. The AUM per folio of `50,000 is 6x that of ETFs and the number of folios is 4% of the equity fund folios.