Go with largecap index, value fund for stable core portfolio

In satellite, include passives that can augment returns, like momentum-based factor strategy

- SANJAY KUMAR SINGH & KARTHIK JEROME

The assets under management (AUM) of passive funds have grown to 10.2 trillion, while active funds stand at 50.9 trillion as of June 2024, according to a study titled Where the Money Flows by Motilal Oswal Asset Management Company. Passive funds now constitute 17 per cent of the industry's total AUM.

Key drivers of growth Experts highlight that both demand and supply factors are behind the increasing popularity of passive funds. The Employees' Provident Fund Organisation (EPFO) is a significant contributor to the growth of passive AUM, but individual investors are also increasingly favouring these funds.

On the demand side, the consistent underperformance of active funds has led investors to explore passive options.

"They have started seeking options that at least match market returns," says Vidya Bala, co-founder, PrimeInvestor.

Successive Standard & Poor's Indices Versus Active (SPIVA) reports have underscored this trend of underperformance in active funds. About 62.1 per cent large cap funds and 75.4 mid and smallcap funds underperformed their benchmarks over the 10-year period, according to the SPIVA India 2023 yearend scorecard.

Two key developments have reinforced this shift. "First, the Securities & Exchange Board of India's (Sebi) new categorisation rules limited the flexibility fund managers had previously.

Second, the adoption of the Total Return Index (TRI), which includes dividends, as the benchmark further accentuated this trend," says Bala.