The passive fund space has seen several new funds mushrooming within a small frame of time. The latest fund house to enter the space is HDFC Asset Management Company. It has filed for nine new exchange traded funds (ETFs) that would play across different themes like low volatility stocks, momentum stocks, quality stocks, and even across different sectors.

According to the Securities and Exchange Board of India’s website, HDFC had not applied for any new funds between December 2018 and August 2021. But out of the twelve funds registered between September and October 2021, only one appears to be an actively managed fund indicating HDFC’s serious interest in the passive space.

The move comes at a time when several fund houses are entering the passive fund business and the sector is becoming more competitive. For instance, stock broker Zerodha has received Sebi’s approval for a new fund while another discount broker, Samco, has already filed for a new mutual fund. Sachin Bansal-backed, Navi, has already entered the sector with extremely low-cost passive funds.

The ETF space has seen the assets under management (AUM) double from Rs 1.54 lakh crore at the end of FY20 (financial year 2020) to Rs 2.9 lakh crore at the end of FY21, according to a report by SEBI. AUM refers to the total investor money held by mutual funds.

A passive fund invests in an asset class by investing in a basket of securities that clones an index. The fund manager does not actively research or select stocks. Passive funds became popular after sustained underperformance by active managers, especially after Vanguard introduced index funds. Since then, different passive funds for various themes and asset classes have emerged.

A passive fund banks on the idea that reducing the churn in a portfolio, and sticking to a long-term strategy should generate more wealth than active investors over the long term. The idea is based on the efficient market hypothesis, whose proponents believe that all information is discounted in the stock price and hence the markets cannot be beaten.

In a mature market like USA, passive funds contribute to almost half the inflows into the markets, while the figure in India is much lower. However, with several active funds charging high fees and yet continuing to underperform, investors might prefer shifting into passive funds.

However, given the low overheads and a standardised product, the only way to differentiate a passive fund from another is by lowering fees. Consequently, some passive funds have seen their fees fall to zero in the USA.

Navi has increased the pressure in the index fund space by offering a Nifty Index Fund at 0.06 per cent expense ratio. Other funds in the space had gone in for an increase in index fund fees just a few months back, but they might have to scale back.

Navi has already filed documents with the SEBI for new passive funds. Similarly, NJ Invest, which is India’s largest mutual distributor, has also launched rule-based passive funds. Zerodha too, plans to focus solely on the passive funds space.

passive fund business

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