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Passive accelerating faster than active

Anil Ghelani, CFA, Head – Passive Investments & Products, DSP Mutual Funds shares growth & future scope for passive investments in India & foreign countries:

Passive accelerating faster than active

Ravi Lalwani: What are the recent trends in passive investing in India over the last 5 years? What trends do you expect in the years ahead?

Anil Ghelani: In India, we are gradually seeing the growth of passive investments. In the last 3 years, Equity Index Funds and ETFs got a higher net inflow compared to the active funds in the large-cap category and this trend is likely to continue. From the total mutual fund industry of about Rs44 billion, ETFs and index funds are now about ~16% of the total AUM. In my view, by 2025 ETFs and index funds will account for 25-30% of the mutual fund industry in India.

How do passive investments in India compare with other foreign countries?

Many countries are seeing potential growth in passive investments like ETFs and index funds, but US has most of the passive investors. In 2012, US industry saw passive funds get higher net new inflows as compared to active funds. This trend picked up so fast that in a few years, active funds started getting net outflows and only passive funds have been getting net new inflows. As of the end of 2022, the US now has about 47% of total mutual fund assets in passive funds. Globally in other countries, this number is estimated at only 10-12%.

While we have seen rapid growth in the mutual fund assets under management, we are still at a very low base relative to many other global markets. If we exclude a few large countries which have mutual fund assets under management to GDP ratio much above 100% and just take a broad average, the ratio is around 75%. So, there is a huge scope of growth, both in terms of assets under management as well as the number of people investing. Today we have about 3.8 million unique investors in mutual funds. On the other hand, we have around 7 million income tax returns filed last year. So, we have a huge potential of reaching out to around double the current size of the investor base, who could potentially have adequate income to set aside some small amounts for regular investments via mutual funds.

Which are the top products that are popular among passive investors in India, and how are you reaching out to prospective customers?

We believe passive investments like index funds and ETFs are meant for all kinds of investors. It could be experienced investors who recognize the impact of cost on their eventual investment outcomes or relatively inexperienced / newer investors who are considering starting to invest but are not sure how, and therefore need a simple instrument that gives them access to the market or to specific sectors they believe in.

At DSP, we have utilized a range of marketing channels to reach out to different segments of investors. This includes mass market out of home media campaigns for education and wide outreach, digital advertising for reaching out to specifically targeted cohorts of investors, and digital content on our website as well as our social media channels which gives one access to a variety of educational content that can help investors or prospects make better investing decisions. Further, we also cover passive investing concepts as part of our financial wellness corporate educational workshops all over India. In the future, we may also consider adding more traditional media channels like radio, print, or even television to increase the width and depth of our passive investments’ educational marketing outreach activities.

How is DSP MF making passive investments popular compared to SIPs?

Ben Graham in his epic book ‘The Intelligent Investor’ first published in the 1950s, had popularized a simple strategy of ‘Dollar Cost Averaging’ which has today become well understood in India by investors who are choosing to invest via SIPs. We believe SIPs are a great way for investors to get started. Today we have about 11 million 2-wheelers for which each year the owner mandatorily buys vehicle insurance, so they are financially aware and can gradually be converted into mutual fund investors – while you are buying the insurance renewal, maybe along with it you can consider starting a small 500-rupee SIP.

This is where passive funds can assist in a big way to increase penetration to new investors who have yet to start their investing journey. This is because they have relatively lower cost and simpler so it can give investors a very clear understanding of their risk and return outcomes. We at DSP are doing various investor education initiatives to increase awareness, such as our recent #LetsIndex campaign focusing on the simplicity of index funds which can be a good starting point.

What trends have you seen among passive investors choosing between human interaction and tech-enabled self service?

One of the big shifts expected in the mutual fund industry is how technology and data will change the way we do business – for the research and investment management function, for sales, marketing, and customer outreach as well as for back office and support functions. For investment management, we have been investing heavily in the in-house platform Jarvis which processes data and offers analytical tools which nudge analysts to interpret the incoming data more efficiently and then help assess the accuracy of opinions based on historical correlations.

This enables us to institutionalize the data and knowledge on a single platform, improves the quality of decision-making, sets accountability, and ultimately leads to better investing outcomes for our investors. Similarly, in sales and marketing, we are fast moving towards an approach that will leverage data and analytics for engaging with customers. Understanding our clients and segmenting based on client behavior to drive hyper-personalization is a key imperative. We have an in-house analytics team integrated within the digital business as one cohesive unit.

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