Passive investment is becoming increasingly popular in the mutual fund industry in India. DSP Mutual Fund estimates that by 2030, 25 to 30 percent of the total assets of mutual funds will come from passive investments.
Passive investments include index funds and exchange-traded funds (ETFs). These funds track a specific market index, such as the Sensex or Nifty. Passive investments offer investors an easy and cost-effective way to enter the stock market. These investments reduce human bias and follow transparent rules.
Passive investments have grown tremendously in popularity in India. In the last three years, passive AUM (total investment assets under management) has grown 182 per cent to INR 9.5 lakh crore. DSP Mutual Fund estimates that the total assets of the mutual fund industry will double to INR 100 lakh crore by 2030, and passive funds will play a key role in this.
DSP Mutual Fund has pioneered in bringing equal weight index funds to India. In these funds, each stock is given equal weighting instead of being weighted based on market capitalisation. DSP has pioneered this space by launching equal weight index funds in 2017 and ETFs in 2021. DSP’s Equal Weightage Index Fund has grown tenfold, which shows the popularity of this strategy.
DSP Mutual Fund has also launched liquid ETF funds that provide investors with a balanced fund while trading stocks in the capital market. DSP currently runs two liquid ETF schemes, including a regular payout scheme and a growth-based NAV scheme.
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Smart beta investment strategies are also becoming popular, which are a bit more active than passive funds. These strategies follow specific rules to minimize risk or maximize returns. DSP has launched index funds in the mid-cap and small-cap segments with a focus on quality. They have also created a new index selecting 50 high-quality companies.
The biggest reason for the growing popularity of passive investments is their simplicity and low cost. Also, passive funds have a more transparent and regular process to manage them. But, it is important to note that passive funds are not risk-free and may not deliver good results in times of rapid market changes.
Investor education is very important to promote passive investing. Creating awareness about simple passive products can be a good starting point for the investment journey. ETFs provide an easy and less expensive way for investors to enter the stock market and are becoming increasingly popular.
What is Passive Investing?
Passive investing is an investment strategy in which investors invest in funds that track a specific market index, such as the Sensex or Nifty. Such funds are called index funds. Passive investments also include exchange-traded funds (ETFs), which trade like stocks and track a specific index. Passive investing does not require actively selecting stocks or managing a portfolio.
Benefits of Passive Investment
1. Low cost: Investors can save money due to low management fees.
2. Simplicity: There is no need to actively select stocks, which simplifies the investment process.
3. Diversification: Investing in all the stocks included in the index diversifies the portfolio.
Risks of Passive Investment
1. Lower returns than active investments: When the market is performing well, passive funds can give good results, but in a bad market, their performance may be less than active funds.
2. Lack of active management: Passive funds do not have any manager who selects stocks or manages the portfolio, so investors cannot have much control over their investments.