New-age fund houses looking to replicate broking success in mutual fund arena

When the new-age broking firms entered the stock broking arena a few years back, they disrupted the whole industry in terms of pricing. These technology-led platforms brought down brokerage rates – made it nil in most cases – that attracted a bulk of new investors to these entities.

Some of these entities are now getting into the mutual fund arena and it seems that they are trying to disrupt the fund management business in the same way they disrupted the stock broking segment.

New fund houses like Navi Mutual Fund and Zerodha are looking to offer passive-managed funds that are less expensive than the actively-managed ones and also come without the risk of fund manager going wrong with the stock picks. Incidentally, Zerodha, which lets investors trade at zero brokerage, has already become the largest broking firm in the country in terms of the number of active clients.

Also read: Zerodha gets SEBI's in-principle nod to set up mutual fund business

Navi Mutual Fund – founded by Flipkart founder Sachin Bansal – has already filed draft document with the Securities and Exchange Board of India (SEBI) for 11 passive fund schemes including, Pharma Index Fund, IT Index Fund, Nifty Bank Index Fund and Nifty Midcap 150 Index Fund, among others.

Zerodha Founder Nithin Kamath has also said that his fund house would launch passive funds, which offer the low-cost advantage to investors.

Passive funds are those that replicate a particular index by having stocks in the same weightage as that of the index. This process does not require any active fund management, which also leads to lower fund management costs compared to an active scheme, wherein the fund manager analyses and picks stocks to get maximise returns.

The most popular example of a passive fund is an index fund that could be based on the Sensex or Nifty or any other sectoral index. A Sensex-based fund would have in its portfolio, 30 stocks in the same weightage as they are in the Sensex.

Also read: L&T Finance in talks with HSBC to sell its mutual fund business: Report

Rapid Rise in Passive Funds

Data from Morningstar shows the total assets under management (AUM) of passive funds have risen at a much faster pace than that of active funds though the cumulative assets of the former are much lower and hence enjoy the low-base effect.

As on July 2021, total AUM of passive funds was pegged at Rs 3.82 lakh crore, much lower than the AUM of Rs 31.05 lakh crore of active funds. The rise in AUM in the one-year period till July 2021, however, was much higher for passive funds that grew nearly 63 per cent compared to 34 per cent for active funds.

Between July 2019 and 2020 as well, the AUM of passive funds grew nearly 46 per cent while active funds rose 6.23 per cent.

While passive funds are a huge hit globally, they are yet to take off in a significant manner in India though the recent past has seen a lot of traction in the passive funds arena -- corroborated by the higher rate of growth in the AUM.
Further, while a total of 11 passive funds were launched in 2018, the number rose to 23 in 2020 and 32 till date in 2021, the Morningstar data shows.

Also read: Equity fund inflows dip 62%, investment via SIPs nears Rs 10K crore mark in August