Index funds have surged in popularity, revolutionizing the investment landscape globally and in India.
Prominent investors like Warren Buffett have long advocated for these funds, particularly for average investors, citing their simplicity, low cost, and relative stability
Mutual Fund houses have launched 5 NFOs so far in May 2024 which include names like Groww Nifty Non-Cyclical Consumer Index Fund, Axis Nifty Bank Index Fund, Kotak Nifty 100 Low Volatility 30 Index Fund etc.
The growing popularity of index funds is reshaping the investment landscape, driven by the underperformance of active funds, cost efficiency, and ease of access, suggest experts.
As highlighted by industry experts, the shift towards passive investing is not only a global phenomenon but is also gaining traction in India.Jaipur Stock
With their inherent advantages, index funds present a compelling case for investors seeking stable, low-cost, and diversified investment options.
ETMutual Funds spoke to Alekh Yadav, Head of Investment Products at Sanctum Wealth, and Pankaj Shrestha, Head of Investment Services at Prabhudas Lilladher, about this growing trend that is reshaping the dynamics of mutual fund investments.
Global popularity of index funds
According to LSEG Lipper, 2023 marked a significant milestone for passive equity funds, with global net assets surpassing those of active equity funds for the first time, reaching an impressive USD 15.1 trillion.
This shift is primarily driven by the consistent underperformance of active funds compared to their benchmarks.
Alekh Yadav of Sanctum Wealth points out that the ease of understanding and lower costs associated with index funds are also significant factors contributing to their widespread adoption.
The Indian perspective
In India, the trend towards index funds is gaining momentum. The share of index funds within the total mutual fund assets under management (AUM) is on the rise.
Yadav notes that while contributions from the Employees' Provident Fund Organisation (EPFO) play a crucial role, high-net-worth individuals (HNIs) are increasingly allocating to index funds.
This shift is largely due to the underperformance of active funds in India, particularly in the large-cap category.
Recently, even mid and small-cap funds have struggled to outperform their benchmarks, further driving investors towards index funds.
Popularity of index funds
Pankaj Shrestha of Prabhudas Lilladher echoes similar sentiments, highlighting the long-term challenges faced by active funds in outperforming their benchmarks.
A study conducted by SPIVA in 2023 revealed that over half (52%) of actively managed Indian equity large-cap funds underperformed their benchmarks.
The figures were even more striking for mid and small-cap funds, with a staggering 74% underperforming their benchmarks.
Shrestha emphasizes that the lower costs of index funds, combined with their ease of selection and variety of options, make them an attractive choice for average investors.
Additionally, index funds tend to be less volatile than active funds, offering a more stable investment avenue for long-term investors.
Advantages of index funds
Cost efficiency: Index funds typically have lower expense ratios compared to actively managed fundsNagpur Stock. This cost efficiency can lead to higher net returns for investors over the long term.Simplicity and accessibility: Index funds are easy to understand and manage, making them accessible to novice investors who may not have the expertise to select individual stocks or actively managed funds.Performance consistency: By tracking market indices, index funds aim to replicate the performance of the benchmark rather than outperform it. This approach reduces the risk of underperformance associated with active management.Diversification: Index funds offer broad market exposure, providing diversification across various sectors and reducing the impact of poor performance by individual stocks.Stability: Due to their passive nature, index funds tend to be less volatile, offering a stable investment option for risk-averse investors.Note: If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on along with your age, risk profile, and twitter handle.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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