Following the launch of a slew of new indices and passive funds in the sectoral or thematic categories, Asset Management Companies (AMCs) have launched 30 passive funds so far in 2024.
That’s three times the number of 11 funds rolled out in 2023, according to data from Value Research.
NSE Indices, the subsidiary of National Stock Exchange of India, has launched 5 sectoral or thematic indices so far in 2024 — Nifty500 Multicap India Manufacturing 50:30:20 index, Nifty500 Multicap Infrastructure 50:30:20 index, Nifty EV & New Age Automotive index, Nifty India Tourism Index, and Nifty Rural Index.
Comparatively, just one such index was launched in 2023.
Expansion of market, growth opportunities in specific sectors, and lack of innovative opportunities on the active fund side have been the key factors fuelling the growth in ETFs and index funds, experts said.
Umeshkumar Daila, Head – ETF sales, Mirae Asset Investment Managers (India), pointed out that if you invest in an active sectoral or thematic fund, it may allocate minimum 80% to that specific sector or theme in line with regulations.
“But when it comes to passive funds, 100% is allocated to the specific sector or a theme as it is based on an index,” he said.
Kumar highlighted that India has historically seen a one-sided growth in active funds, while passive funds did not take off initially.
Nine of the 30 passive funds launched this year are based on the five new indices from the NSE. Apart from these five indices, funds have also been launched based on defence, tourism, PSUs, banking, and information technology.
As per the Securities and Exchange Board of India (Sebi) guidelines, a fund house can only launch one fund in a certain category. These categories include large cap fund, large & mid cap fund, mid cap fund, small cap fund, multi cap fund, etc.
But when it comes to index funds and ETFs, there are no such restrictions, and this has been driving innovative product offerings in this space, an industry expert said. The share of passive funds in total AUM of fund houses has risen from 7.4% in FY20 to 17.5% at the end of FY24, as per the data from Association of Mutual Funds in India (AMFI).
Highlighting the significant rise in investor interest in passive funds over the last few years, NSE on Tuesday launched a website dedicated to passive funds. “The increasing contribution of folios in the MF industry is incrementally being contributed by index funds.
“Nearly 11% of new folios last financial year came from index funds. It is only the beginning of a growing trend,” noted Vishal Jain, CEO of Zerodha Fund House.
The sectoral/thematic funds will likely gain further traction as the market expansion provides depth for investors in specific sub-themes and sectors, according to industry experts.
“When we launched India EV ETF, we got over 22000 applications. That itself is a validation that if a product is unique, and in line with (trends) in the global market, investors will definitely like that,” Daila said.