What percentage of MF AUM is in passive funds?

Published: November 4, 2021 at 7:42 am

In this article, let us determine what percentage of mutual fund AUM is in passive funds (index funds and ETFs). We shall consider four dates to consider the AUM growth.

1: Sep 2021 (latest at the time of writing); 2: March 2020, when the mark fell due to the pandemic/lockdown. 3: Jan 2018 – Before the market imbalance, visibility started to get bigger and bigger until the March 2020 crash. That is, Sensex and Nifty moved upon the strength of their top few stocks while the remaining cap segments kept moving down. See: Return difference of Nifty 50 vs Nifty 50 Equal-weight index at an all-time high! And Market crash destroys the two-year imbalance among Index stocks. 4: Sep 2016 – five years ago.

We shall compare the AUM of all active equity funds (excluding hybrid funds) with the AUM of all index funds and the AUM of all index ETFs.

MonthAUM ActiveAUM IndexAUM ETF

Next, we consider the fractional AUM.

MonthIndex AUM/ Active AUMETF AUM/Active AUMPassive AUM/Active AUM

Currently, the total index AUM is about 2% of the total active AUM. Until Jan 2018, when there was no visible evidence of index fund outperformance, the index AUM was only about 0.5% of active AUM.

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    It is only after investors saw the “star ratings” of active funds (esp. large cap funds) fall and those of Nifty, Nifty Next 50, and Sensex funds rise did they increase “exposure” to index funds.

    Retail investor participation in ETFs has increased and is much higher than the corresponding increase in index funds. The lockdown and increase in stock investing/trading have played a role. However,  the increase in ETF AUM is not entirely because of retail participation. EPF inflows have had a big role to play since Aug 2015. Today, SBI-ETF Nifty 50 accounts for 45% of the total ETF AUM, and SBI-ETF Sensex accounts for 22%.

    The remaining AUM is about 8-9% of the total active AUM but may have contributions from other institutions, plus some portion of this AUM may also stem from retail investors trading. This AUM increase explains why AMCs are keen to launch and advertise new ETFs (“low-cost mutual fund”).

    While a jump from 0.5% to 2% in the index fund space nearly four years or so is significant, the inflow may not be as enthusiastic in future. At the time of writing, there are no 5-star rated passive funds at Value Research, unlike the situation a year ago. There are only three 4-star rated Sensex funds.

    Mutual funds investors follow the (recent) past performance with a small lag. The plethora of passive NFOs flooding the market is unlikely to meet with a positive response immediately.

    Let us try to appreciate the increase in index fund inflow with a crude estimate. First, we sum the NAV of all active funds as of March 2020 and Sep 2021 and find the percentage change = 114%. Next, we find the percentage change in AUM in this window = 120%.  So increase in inflow = 120% – 114% = 6%. approximately.

    In the case of index funds, the increase in inflow is a whopping 103%. Of course, on an absolute basis, this is small, but the increase in the popularity of index funds (relative to Mar 2020) is clear.

    Between Jan 2018 and March 2020, the inflow into active funds is 23%, while the inflow into passive funds is an impressive 174%. This is a period when the fraction index fund AUM/ Active fund AUM increased by 2.66 times. Between Sep 2016 and Jan 2018, the inflow of active funds and index funds was comparable – 33% and 34%, respectively.  We have not included ETFs in this comparison since the data is skewed by EPF AUM.

    In summary, the index fund AUM is a mere 2% of the active fund AUM at the time of writing. The ETF slice is higher but dominated by EPF inflows.  While the recent growth in index fund AUM has been impressive, it has been based on recent past performance, similar to how any fund becomes popular. See, for example, the AUM of Parag Parikh Flexi Cap Fund grew by 147% in 2020!

    We believe that this growth in index fund AUM (excluding EPF contribution) may not sustain. Most MF investors suffer from shiny object syndrome and are likely to increase exposure to their active funds once they seem to outperform.

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