Passive investing in mutual fund schemes is not popular in India. Investors have preferred schemes managed by fund managers because of their ability to beat returns of the underlying benchmarks.
However, two passive funds in the large-cap category have stolen a march over their actively managed peers.
R*Shares Nifty BeES, the oldest and most popular Nifty tracking ETF, has beaten nearly half of all large-cap funds over the past five-year, seven-year and 10-year period, Value Research data compiled by Tavaga, a robo-investing platform, show. The returns would be higher if one takes into account that the fund pays out the dividend of 1-1.5 per cent every year, say experts.
Junior BeES, which tracks Nifty Next 50, has beaten 87 per cent of all large-cap funds over the last five years, 61 per cent of all large-cap funds over the last seven years and 55 per cent of all funds over the last 10 years.
"Most large-cap fund managers claim that they will beat the index by 2-2.5 per cent. In practice, it may be difficult for investors to realise the higher returns because of their tendency to churn their portfolio and also the fact that very few funds have actually consistently beaten the benchmark. Returns may also vary depending on the investors' or his distributors' ability to pick the right fund," said Ravinath Dasika, co-founder, Tavaga.
ETFs are marketable securities that track an index and are traded on the stock exchange. ETFs experience price changes throughout the day as they are bought and sold.
According to Manoj Napgal, CEO, Outlook Asia Capital, the preference of active funds over passive funds is common to markets where institutional participation is low and the universe of stocks is under-researched. "India is slowly moving towards passive investing but the change may time," he said.
Experts believe that one of the main reasons investors should buy passive funds is the cost difference of about 150-200 basis points vis-a-vis actively-managed funds. Active funds typically charge 2.5-3 per cent in expenses compared with 0.5 to 0.05 per cent charged by index funds.
Expenses for passive funds are also set to decline. Nifty BeES currently charges the current expense ratio on this fund is 0.5 per cent, higher than most Nifty tracking funds. The funds charges have been decreasing steadily — 3-4 years ago, the charges were about 0.7 per cent and about a seven years ago the fees were one per cent.
With EPFO money coming into passive funds, a few funds have dropped charges to under 0.1 per cent. This trend may accelerate in the future, adding to the outperformance of passive funds. In the developed countries such as the US, fees passive funds typically charge 0.02-0.03 per cent as fees.