Index funds have been the flavour of the season for mutual fund houses, with the number schemes in this category rising to 341 in August from 230 last year – a rise of 48% on year, the highest among all categories.
Experts said that the rise in index funds is a good thing for investors, as the cost are lower compared to actively-managed funds. They also advise investing in broader market funds to diversify across segments and sectors.
Why Broader Diversification Matters
Hemen Bhatia, ED and CEO of Angel One Asset Management Company highlighted the need for diversification in the core portfolio by investing in broad-based schemes. “By investing in a Nifty Total Market index fund over 90% exposure can be achieved in India’s market and around 45-50% through a Nifty 50 fund,” he said while noting that investors should be mindful of entry and exit in the thematic index funds.
Citing data, he said, most of the inflows across the passive universe come into broad based indices like Nifty 50, Sensex and other broad market indices across market cap segments, with recent data suggesting inflows in gold & silver funds.
Investor Trends in Passive Funds
In August, 341 index schemes garnered inflows of Rs 1,502.57 crore and 279 gold and other ETFs attracted Rs 9,433.62 crore. Pratik Oswal, head of passive funds at Motilal Oswal AMC said retail and high net worth investors have adopted index funds in a very big way, whereas ETFs tend to be focused towards corporates and pension funds.
Investing even in a Nifty 50 fund concentrates 60% of the investment in the top ten stocks and half of it in only two sectors, he said.
Siddharth Srivastava, Head – ETF Product & Fund Manager, Mirae Asset Investment Managers (India) also noted in passive funds, within equity market cap-based category, around 75% of inflows in last 1 year has come in funds based on Nifty 50 and Sensex 30 index predominantly because of familiarity with these indices and the fact that both of these indices capture Indian blue-chip companies and conversation around the under performance of large cap active funds vis-à-vis these indices.
He added: “Though investors should understand that Indian equity markets have grown significantly in the last 5 years both in terms of opportunity and size, for example, Nifty 50 now represents even less than 50% of the equity market based on full market Cap. So, if an investor wants to take passive exposure to Indian equity markets, then investment in index products based on Nifty/BSE 500 or Total market cap may be a better way to go about it, as it provides wider exposure to multiple segments and industries and better coverage of the equity market.”
Oswal added the philosophy of indexing means buying the market and only a couple of index funds today like Nifty 500 are actually buying the market. “The rest come in this category called active selection,” he said. “India is an active market, whether it is for active funds or passive funds.”
He believes that pureplay passive funds are still not getting the same AUM that we’re seeing in countries like the US where everybody wants to invest in S&P 500, which is a very simple total market fund.