About 76% of retail investors are now familiar with passive funds, and 68% already hold at least one passive product, said Akhil Chaturvedi, Executive Director and Chief Business Officer at Motilal Oswal AMC. He added that a recent study by the firm shows the passive industry’s AUM has grown more than sixfold over the past six years, reflecting rapid adoption. In a conversation with Business Today, Chaturvedi explained why these products are gaining popularity among investors. Edited excerpts.
BT: Which factors have driven the growth of passive funds? And what factors should investors consider while choosing index funds?
Chaturvedi: Popularity of index funds among investors has tremendously increased over the years due to low cost, diversification and simplicity. Awareness is no longer limited to broad-based index funds; investors are increasingly accepting factor-based index funds. Investors may prefer a suitable index fund from among the wide choice suiting their risk appetite and investment goal.
BT: Where do you see the AUM of index funds over the next five years?
Chaturvedi: We expect momentum in index funds to continue to sustain and build from here. Increasingly, investors, especially HNIs and family offices, are segregating their beta exposure (through index fund exposure) from alpha allocation (actively managed funds). Index funds are additionally good for taking investment exposures to precious metals like gold and silver in an effective way. Passive fund, including index fund and ETF’s AUM has grown 6 times in last 5 years to Rs 12.20 lakh crore. This itself may give an indication of the AUM potential of passive funds over next 5 years.
BT: Which categories of index funds are likely to outperform going ahead? How do you see the movement of Nifty and Sensex over the next 5-10 years?
Chaturvedi: Returns from equity markets over the long term reflect the earnings growth profile of the underlying basket. India’s nominal GDP growth can be expected to be in the range of 10% to 12% over the next 5 years. This would be a good reference point for return expectations from mainstream indices, especially given the current premium valuations in the market. Earnings growth expectation is higher in mid and small segments, given the fact that most high-growth industries are represented in this segment. Investors may thus either choose NSE 500 as a fair representative basket. Investors with moderate risk appetite may further add to it through separate allocation in a midcap index fund.
BT: How much time should one give to index funds?
Chaturvedi: The investment horizon criteria do not change based on whether it is an active fund or an index fund. If investing with a specific goal in mind, the investment horizon should match the goal horizon. Otherwise, equity investments should be held for at least three years or more.
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