India’s $ 442 billion asset management industry must finally reckon with the passive investing juggernaut.
After decades of sluggish growth, the number of accounts invested in index or exchange-traded funds more than doubled to 5.6 million in April. Passive products now represent nearly a quarter of equity assets under management compared to around 16% two years ago, according to data from the Association of Mutual Funds in India. This compares to over 50% in the United States
The foundations for the boom were laid by a series of regulatory changes preventing active fund managers from playing in the rankings. What supercharged him was the Covid-19 pandemic which, like elsewhere, has fueled a surge in retail investment that has seen millions of new young traders stack up in Indian stocks through online apps. . Their interest is now pouring into ETFs, creating an opening for a promising asset manager to become India’s own Vanguard.
Zerodha Broking Ltd., a Robinhood-type trader who has become India’s largest brokerage, is awaiting regulatory approval for an asset management company that will focus solely on passive investing.
The aim is “to offer a product that is easy to understand for new investors,” said Nithin Kamath, CEO of Zerodha. “Like how Vanguard’s retirement fund in the United States made investing easier. “
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Vanguard, based in Malvern, Pa., Is best known for the passively managed index funds started by founder John Bogle. He has no plans to enter the Indian market at this time, a spokesperson said.
With strong national players, India has always been a difficult market for large global asset managers, and some of them have left the local industry after racking up losses. Fidelity International and Goldman Sachs Group Inc. have sold the Indian units of their fund management business over the past decade.
“In India, while people have launched passive investment products, the focus has not been passive as most of the income is generated by active funds,” Kamath said. “We believe there is an opportunity for an exclusively passive asset management company in the country.”
Angel Broking Ltd., which also operates a low-cost equity trading platform, also plans to enter the asset management industry by creating a mutual fund focused on passive investment products. technology-based.
Aspirants hope to scale up the ETF market quickly in the same way their inexpensive and often free services – along with accessible online platforms – have helped them shake up the stock exchange industry in India.
Like elsewhere in the world, one of the main drivers of the passive fund rush is cost. The fees for index funds in India are typically around 0.1-0.2%, while for actively managed funds, they can be 1-1.5% of assets.
20 years of waiting
“These are very exciting times, something that I have been waiting for almost 20 years,” said Vishal Jain, head of ETFs at Nippon Life India Asset Management Ltd., who was investment director of the first passive investment fund. of India in 2001. As of March 2020, it had 1 million clients invested in ETFs. Now it’s 2.3 million. “What took 19 years between 2001 and 2020, we did in the last year.”
The rapid development of ETF investments is also due to regulatory reforms.
In 2017, the Securities and Exchange Board of India acted to prevent fund managers from loading large cap funds with small to mid cap stocks in an attempt to outperform their benchmarks. The following year, authorities demanded that performance be disclosed relative to the total return index of the corresponding benchmark, as opposed to the price index which did not include dividends.
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Together, these reforms have made the underperformance of active funds suddenly much more visible to ordinary investors. The S&P BSE 100 Index, an indicator of large Indian companies, beat 100% of actively managed large-cap mutual funds in the second half of 2020, according to data from the S&P Dow Jones indices.
“It has now reached a tipping point,” said Anish Teli, managing partner of QED Capital Advisors LLP in Mumbai, an investment firm for high net worth individuals that offers active and passive options. “The regulator’s actions have been a catalyst in bringing out the benefits of passive investing more clearly.”
(With help from Sam Potter.)