Passive Investing in India Sees 8-Fold Jump: Why You Should Consider This Low-Cost Strategy for Higher Returns

Passive investing in India has experienced a remarkable eight-fold growth over the past five years, driven by the rise of digital investment platforms, increasing financial literacy, and shifting behavioral trends among young investors. Despite this surge, the figures remain significantly lower than those in developed markets like the US.

Driving the Acceleration of Passive Investing

The expansion of passive investing can be attributed to several key factors, including the structural evolution of the Indian market, which has become more efficient due to deeper financial penetration and a high concentration of skilled active managers. As a result, the scope for consistently outperforming the benchmark has narrowed, leading many investors to opt for products that offer clarity, cost advantages, and predictable index-linked outcomes.

Key Differences Between India and Developed Markets

While passive investing dominates in developed markets, India's asset management industry has been dominated by players offering both active and passive products. However, with the advent of passive-only AMCs, investor education regarding the benefits of passive investing is now on the rise. This is expected to lead to increased adoption of passive investing among all investor categories, including retail.

Expected Growth in Passive Products

In the next 3-5 years, core and satellite asset allocation approaches are expected to gain popularity. Broad market index products and Smart Beta index ETFs & Index Funds are likely to be in demand, as they offer market returns and the potential for higher returns through rule-based products. Thematic funds, on the other hand, are considered risky and may not be as popular.

Risks Associated with Passive Investing

Indian retail investors are aware of the quantitative factors such as tracking error, but may not fully understand the risks associated with passive investing, including liquidity risks. However, the liquidity of passive funds is dependent on the liquidity of the underlying constituents, and most fund houses have market-making entities providing liquidity for their ETF units.

Balancing Profitability with Scale

As passive investing typically comes with lower margins, Angel One AMC plans to balance profitability with scale by handling huge AUMs and keeping costs low. The largest asset managers globally have substantial assets under management under passive schemes, and a similar trend is expected in India.

Remember, this is a perspective, not a prediction. It's essential to do your own research and consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.