In December 2020, the Securities and Exchange Board of India (Sebi) sparked off a gold rush in India’s mutual funds space. The market regulator eased entry norms eased entry norms Livemint Sebi eases profitability criteria for mutual fund sponsors Read more for becoming a mutual fund sponsor—a person or entity that can set up a mutual fund. Its earlier entry barrier, being profitable for three of the preceding five years (including the most recent one), was withdrawn. Instead, interested parties need only show a net worth of Rs 100 crore ($13.7 million).
Some were already waiting in line, but since Sebi’s decision, applications have flown in thick and fast from a disparate but single-minded set of candidates. In the fray are portfolio management service (PMS) firms promoted by market mavens, India’s largest stockbroking platform, one of India’s largest non-banking finance companies, and India’s largest mutual funds distributor. Also in the queue are well-heeled startups and investment platforms.
All of them want the same thing—a piece of India’s fast-growing mutual funds space. Assets under management (AUM) has grown from Rs 12,30,000 crore ($169 billion) in March 2016 to Rs 32,40,000 crore ($444 billion) as of April 2021. And the ceiling for growth is still nowhere in sight. Compared to global markets, the Indian market is significantly underpenetrated.
“The penetration of mutual funds is quite low in the country despite rising participation as awareness increases. Global AUM to GDP ratio would be around 70%. In India the AUM to GDP is under 15%. So, the potential is large,” Ajit Menon, CEO of PGIM Mutual Fund, told The Ken.
Interestingly, not only are all these businesses after the same prize, many of them are also banking on the same path to success—launching passive funds. These are funds that ‘passively’ track the performance of a market index such as the Nifty 50 or Sensex. Passive funds are still relatively uncommon in India. Active funds—where fund managers look to outperform the market by ‘actively’ investing in specific stocks—are the more mainstream option.
NJ India Invest, the country’s largest mutual fund distributor and the only applicant other than fintech Navi to receive the go-ahead from Sebi, expects to launch rule-based funds, a type of passive fund, in the quarter ending in September. Wizemarkets, Zerodha, and Navi also plan to launch passive funds.
Smart-beta funds and rule-based funds are both types of passive funds, but with tweaks. The weight of the portfolio’s constituents is based on some predefined parameters, known as factors, to improve performance. These factors include low volatility, value, high quality, etc.
Walking the passive path, while still nascent, has its own appeal. For one, these new firms can, for now, avoid going head-to-head with big fund houses, who dominate the active fund space.