0:05

For a while now, the new

0:07

kids on the block in India's

0:09

$750 billion mutual fund industry have

0:11

been trying to really shake things

0:13

up. I'm talking about the likes

0:15

of Navi, Zirodha, Grow, the non-banks

0:18

and discount brokers that are relatively

0:20

new to a game that has

0:22

so far been dominated by legacy

0:25

fund houses. You see, these newbies

0:27

have been dreaming of a big

0:29

disruption. And a couple years ago, they

0:31

thought they had found the answer to

0:33

their prayers. A playbook that would...

0:35

catable their growth. So what

0:37

Zerodha Navi and Groh decided

0:40

to do was they decided

0:42

to sort of introduce passive

0:45

funds. So around like some

0:47

sometime around 2021 these new

0:49

fund houses decided to introduce

0:52

like a slew of NFOs

0:54

that were mostly like passive

0:56

funds. That's my colleague Achish

0:59

Meyer. She's been tracking how

1:01

these new players, Navi Zerodha and

1:03

Grou, have been betting big on

1:05

passive funds. But the obvious first

1:08

question is, what are they? Okay,

1:10

so there are two types. One

1:12

is an active fund and a

1:14

dandel is a passive fund. An

1:16

active fund is essentially a scheme

1:18

which will look to outper the

1:20

benchmark. A passive fund is just

1:22

a plain vanilla index fund that

1:24

will look to just mirror the

1:26

benchmarks returns. So typically passive

1:28

funds are either index funds

1:30

or exchange-traded funds, ETFs, that

1:33

don't rely on expensive fund

1:35

managers. Instead, like Archigma said,

1:37

they just mirror the market.

1:39

And these newbies can't get enough of

1:41

them. In fact, in the last six

1:43

months, they've all launched new fund, and

1:46

every single one of them has been

1:48

a passive fund. So in February a

1:50

Navi mutual fund debuted with a

1:52

variant of a small cap fund

1:54

which was called the nifty small

1:56

cap 250 momentum quality 100 index

1:59

fund Like it sounds like, it

2:01

itself sounds too long, right? And

2:03

around at the same time, Grow

2:05

had also introduced two passive funds,

2:07

one that was tracking the nifty

2:10

200 and another that just buys

2:12

the first one. So, and also

2:14

last October, Zerota Fundhouse had rolled

2:16

out an open-ended scheme investing primarily

2:18

in units of a gold ETF.

2:21

Now, there's a good reason for

2:23

them to think that this is

2:25

the future. Passive funds have had

2:27

a proven track record in the

2:29

US. In fact, last year, for

2:32

the first time ever, they even

2:34

managed to overtake Active Funds in

2:36

Assets Under Management, or EUM. Forms

2:38

like Black Rock and Vanguard were

2:40

able to build empires entirely based

2:43

on this shift. So naturally that

2:45

got newbies here thinking, why not

2:47

us? Well, unfortunately for them, things

2:49

haven't been playing out quite as

2:51

dramatically as they had hoped. You

2:53

know, you can say that it

2:56

wanted to sort of replicate the

2:58

success in the US, but if

3:00

we are taking official stats, official

3:02

data, it's not been, I mean,

3:04

data sort of tells us like

3:07

a very different story. Well, yes,

3:09

passive EUM has surged. In fact,

3:11

it's more than tripled in four

3:13

years. But as a share of

3:15

the total mutual fund industry, well,

3:18

it's been a sluggish climb from

3:20

9% in 2020 to just 16%

3:22

in 2023. And the thing is...

3:24

Even when it comes to that

3:26

16% slice, these newbies aren't the

3:29

ones that have been reaping the

3:31

rewards. They account for merely 1%.

3:33

So is the revolution they hoped

3:35

for dead? Well, let's find out.

3:37

Welcome to Daybreak, a business podcast

3:39

from the Ken. I'm your host

3:42

Rahil Philopos and I don't chase

3:44

the news cycle. Instead, every day

3:46

of the week, my colleagues Nikhash

3:48

Sharma and I will come to

3:50

you with one business story that

3:53

is worth understanding and worth your

3:55

time. Today is Tuesday the 8th

3:57

of April. I

4:15

think India, what it wanted to

4:17

do was it wanted to create

4:19

its own Vanguard. Vanguard is by

4:21

far the largest, you know, passive

4:24

fund AMC in the US, right?

4:26

So in an attempt to like

4:28

sort of get to that space,

4:30

I think the new age players

4:32

wanted to sort of, you know,

4:35

sort of get into the market

4:37

saying, hey, listen, this is what

4:39

this is the product that we

4:41

are offering and we believe this

4:43

product is the future. Passive investing

4:46

was supposed to be an inevitability

4:48

in India. But the first shift

4:50

happened back in 2017 when Sebi

4:52

rewrote its rulebook. So at that

4:55

point of time what happened is

4:57

that Sebi had forced fund managers

4:59

to like properly define what a

5:01

large cap, mid cap and a

5:03

small cap stock would be. So

5:06

that would limit like how much

5:08

their funds could... drift between categories.

5:10

For example, you know, managers who

5:12

have been quietly patting up their

5:14

large cap stocks, large cap funds

5:17

with like mid cap and small

5:19

cap stocks, they couldn't do it

5:21

anymore. They had to stick to

5:23

like one particular lane. So what

5:25

was even worse that is that,

5:28

you know, the fund house could

5:30

no longer launch more than one

5:32

fund in an active category. Passive

5:34

funds did not have that sort

5:36

of a restriction. Because they were

5:39

anyways following, they were anyways, you

5:41

know, replicating the performance of the

5:43

benchmark. And due to that, many

5:45

indices had sprung over the years.

5:48

Even after that, everything pointed in

5:50

the passive direction. low fees, a

5:52

bull market and also several data

5:54

points indicating active funds underperforming. Which

5:56

explains why between 2020 and 2023,

5:59

we saw passive funds as share

6:01

of mutual fund assets climb quite

6:03

steady. But cut to 2020. 25

6:05

and things aren't looking all that

6:07

great. Unlike in the US where

6:10

passive fund AUM had grown steadily

6:12

and even surpassed active fund AUM,

6:14

the same trend isn't quite playing

6:16

out here in India. Last year

6:18

in fact, passive funds as a

6:21

share of the total mutual fund

6:23

industry actually shrunk. It seems like

6:25

the grand march of passive investing

6:27

in India is starting to roll

6:29

backwards. And Atchishma says there are

6:32

three reasons for it. So one

6:34

of the one of the factors

6:36

that sort of went against passive

6:38

funds is like active funds is

6:41

still dominant in India like mutual

6:43

fund distributors still want to push

6:45

active funds to their investors just

6:47

for the one single factor that

6:49

you know they just pay healthy

6:52

commissions like I remember this distributor

6:54

giving like context to it. So

6:56

if we were to push a

6:58

passive fund to an investing, he's

7:00

probably going to gain like only

7:03

10 or 20 pasa for every

7:05

100 rupees that's being invested. So

7:07

in that sort of scenario, it

7:09

doesn't make good business sense for

7:11

the distributor himself, right? So what

7:14

they would rather do is like,

7:16

you know, they would want to

7:18

push like an active fund to

7:20

an investor and he would rather

7:22

gain like... a much bigger commission

7:25

in that sense. At the end

7:27

of the day, India's fund industry

7:29

runs on commissions. Like Atrichma mentioned,

7:31

even if passive funds are good

7:34

for the customer, it has to

7:36

make good business sense for the

7:38

distributor. This is after all a

7:40

system where distributors have a very

7:42

strong say. And one more thing

7:45

is that, you know, active fund

7:47

NFOs have garnered more than passive

7:49

fund NFOs. So from, if you

7:51

take from the timeline of India,

7:53

from 2020 to like March 2025.

7:56

You know, active on NFOs that

7:58

have been introduced during that time,

8:00

what was once like, you know,

8:02

an initial AEM, AEM is assets

8:04

on the management, what was initially

8:07

like an AEM of 3.1 lakh

8:09

road has now gone. grown to

8:11

about 5.6 lakh. And whereas for

8:13

passive funds, what started out from

8:15

43,000, has now just has now

8:18

only grown to like 2.1 lakh

8:20

and it's like a fraction of

8:22

what active funds have managed to

8:24

like, you know, have what active

8:27

funds have managed to garner at

8:29

this point. The biggest NFOs in

8:31

recent years have all been active

8:33

funds. Not just that, they were

8:35

all being led by legacy fund

8:38

houses, the likes of SBI, HDFC

8:40

and ICICI. In fact, quite impressively,

8:42

SBI alone accounted for half of

8:44

the top 10 highest-dosing NFOs between

8:46

2020 and March 2025. Even if

8:49

you look at the most successful

8:51

passive NFO, which is Motila Loswal

8:53

Nifty Inda Defense Index Fund, it...

8:55

barely raised a fraction of what

8:57

an active fund would. You see,

9:00

more passive launches failed to cross

9:02

200 craw rupees in AOM, and

9:04

the numbers are even worse for

9:06

newbies. Some of Navi's funds, for

9:08

instance, couldn't even hit 10 craw

9:11

rupees. Achitma says a big reason

9:13

for that is because fund houses

9:15

just don't know how to keep

9:17

things simple, which was the whole

9:20

point of index funds in the

9:22

first place. People go to a

9:24

passive fund because it just because

9:26

of the fact that it will

9:28

replicate the benchmark's performance. But when

9:31

you're going to add, when you're

9:33

going to add like other type

9:35

of factors like momentum quality value,

9:37

all of these factors when you

9:39

just put it then, the investor

9:42

just gets like confused. Like what

9:44

mutual fund scheme should I go

9:46

to? You know, it's like you

9:48

know. left right and center when

9:50

like you know when mutual fund

9:53

houses they start introducing schemes like

9:55

this rather than giving like a

9:57

plain vanilla index the investor just

9:59

gets confused like you know okay

10:01

how do I now okay which

10:04

one should I actually go towards

10:06

to like what is the criteria

10:08

the thing is even the complicated

10:10

stuff is selling especially when it

10:13

is launched by a legacy fund

10:15

house. You see, they don't want

10:17

to miss out if passive becomes

10:19

big. So they've also just been

10:21

throwing everything at the wall. But

10:24

in their case, the chances of

10:26

something actually sticking is considerably higher

10:28

than with the newer entrance. Players

10:30

like SBI, ICICI, HDFC, they've still

10:32

continued to rule the rules. For

10:35

example, I can give you. There

10:37

was this instance where SBI had

10:39

launched a slew of passive NFOs

10:41

in 2022 September and all of

10:43

them had garnered an initial AOM

10:46

of at least like you know

10:48

900 crores. You can take that

10:50

in comparison to what gross current

10:52

AEM is just about like you

10:54

know some 1,700 crores. So you

10:57

you get the disparity right. And

10:59

one of the reasons why these

11:01

legacy fund houses have been able

11:03

to have been able to capture

11:06

this is because once they have

11:08

like a robust distributor system, they

11:10

also have brand name. You would

11:12

believe someone like an SBI over

11:14

a relatively newer fund house, right?

11:17

So that sort of brand name

11:19

sort of helps in like, you

11:21

know, people going towards these legacy

11:23

fund houses. So breaking into this

11:25

increasingly complicated passive market is hard

11:28

for new players. But after that,

11:30

the fact that there is an

11:32

even bigger player waiting in the

11:34

wings. The real disruptor, geo-Blackrock. This

11:36

is a subsidiary of geo-financial services

11:39

formed in partnership with the US-based

11:41

investment company Blackrock. It's still waiting

11:43

on regulatory approvals, but once it

11:45

does enter the picture, everything could

11:47

change. Actually, I remember one of

11:50

an executive whom I was talking

11:52

to, actually he was a mutual

11:54

fund distributor, who I was talking

11:56

to, he was saying when the

11:59

geo Black Rock AMC starts coming

12:01

into play. What he said was,

12:03

he made the geo Black Rock.

12:05

you may not be able to

12:07

sort of make that big of

12:10

a dent in passive funds because

12:12

there's already like so many variations

12:14

going on in the passive fund

12:16

space itself but what it can

12:18

do is like make a disruption

12:21

in the active fund space say

12:23

for example if they sort of

12:25

introduce an expense ratio of you

12:27

know a lower expense ratio of

12:29

for example like 0.4 or 0.5

12:32

percent which is much lower than

12:34

the industry average other legacy fund

12:36

players will be forced to like

12:38

follow that sweet right because and

12:41

then in that sense geo black

12:43

rock will become like the cost

12:45

leader in at least when when

12:47

it launches. So what does that

12:49

mean for the likes of Ziroudha

12:52

or Nadi or grow and their

12:54

dream of a Wangath style passive

12:56

revolution? So it is going to

12:58

be a slow game like it's

13:00

not easy Like competing with like

13:03

a large fund house like an

13:05

SBI or an HDFC, right? Especially

13:07

with the kind of AEMs that

13:09

they all have at this sort

13:11

of moment, it's going to be

13:14

like a slow burn game. So

13:16

there is no two ways about

13:18

that. A full subscription unlocks daily

13:20

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13:27

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13:29

Today's episode was hosted by Rahill

13:31

Philipos produced by Meekhta Sharma and

13:34

edited by Rajiv Sien. you

14:19

video.