Passive Investing Revolution: How Corporates and HNIs Are Dominating the Market!

As passive investing gains momentum in India, corporates take the lead, while retail investors face challenges in embracing the benefits of low-cost, easy-to-invest passive funds.

• Passive investing has gained significant momentum in India over the past five years.
• Retail investors' contribution to passive AUM remain small, accounting for only a fraction of the overall AUM.
• The flows into passive investing are predominantly from corporates and HNIs.

Passive investing has grown significantly in India over the past few years, with a rising contribution to overall assets under management (AUM). However, a recent report reveals that retail investors have yet to fully embrace passive funds, limiting their share of the market. This article explores the trends and factors behind the surge in passive investing while highlighting the challenges faced in attracting retail investors.

Shift towards passive investing

Passive funds, designed to track benchmark indices, have gained substantial traction in India. Data from Motilal Oswal Financial Services indicates:

• Exchange-Traded Funds (ETFs) and Index Funds have witnessed impressive compound annual growth rates (CAGRs) of 38% and 129%, respectively, over the past five years.
• In contrast, active equity schemes have only achieved a CAGR of 17%.
• The share of passives in the overall AUM has increased to around 16.5% in March 2023, up from approximately 6% in June 2019.

Retail investors' reluctance

Retail investors have been hesitant to participate in passive investing, with 75% of retail assets still acquired through distributors. Registered Investment Advisors (RIAs) earn minimal fees when selling ETFs, whereas equity schemes offer commission rates exceeding 80 basis points.

Also Read: What is the difference between actively and passively managed funds?

The dominance of HNIs in passive investing

High net-worth individuals (HNIs) have emerged as the dominant players in the passive investing space.

• HNI's contribution to ETF assets under management has shown a remarkable 70% CAGR from FY19 to FY23, reaching Rs 34,000 crore in FY23.
• The number of HNI folios in ETFs remains at 2% of equity funds' folios, indicating significant potential for further penetration.
• HNIs prefer platforms that allow direct investments into passive funds.
• Nippon AMC holds around 64% of the market share in HNI ETF assets under management, followed by Edelweiss AMC with approximately 19%.

EPFO's impact

The corporate segment, led by the Employees' Provident Fund Organisation (EPFO), accounts for about 99% of total ETF assets under management. The EPFO's investment in stock markets via ETFs has been a driving force for the market since 2015.

• The equity portion of the EPFO corpus is growing slowly, currently at 10%, with an estimated 5–6 years needed to reach 15%.
• Among the top 30 cities in India, where corporate AUM dominates, over 70% of the assets are channelled through direct channels.
• As of FY23, the corporate’s share in ETF assets under management was as follows: 
  • SBI AMC: 51%.
  • UTI AMC: 14%
  • Edelweiss: 11%
  • Nippon: 10%

To sum up

While passive investing gains momentum in India, retail investors need to catch up to adopting passive funds due to the prevalent distributor-based distribution model and lower commission rates compared to equity schemes.