The MF Assets under Management has grown to under Rs.25 Lakh Crores. A lot of changes have happened to ensure that the MFs continue to be safe and attractive for the consumers at large.
One of the options given to the client is the Direct Plan option where the investor can invest in a no-commission product, at a lower cost.
This presupposes that the investor knows the landscape well and will be able to make informed decisions. Else, the investor would have an advisor who would guide him.
Direct plans the lowering of costs in Regular plans were seen as big developments in the evolution of MFs in India. The bigger disruption in the investment space is yet to come. It would come in the form of passive funds.
There are about five contributory factors, which may aid the mainstreaming of passive investing.
For these reasons, passive funds may start gaining currency may start asserting themselves as a credible investment option, in the near future.
Currently, very few Index funds are available for investments. There are many more Exchange Traded Funds ( ETF ) available, tracking a wide variety of indices.
There are many Indices Smart-beta indices built around the main indices. There are MF schemes/ ETFs which track these indices. Here is a compilation of many of the indices and some of the funds/ ETFs, tracking the corresponding indices.
Dealing in Index funds is easy, though the expenses are somewhat higher than that of ETFs. Liquidity is assured here as the Fund House is the counter party.
Regular investments are easy in Index Funds and Demat accounts are not needed. The negative currently is that there are index funds tracking very few indices.
ETFs are available around a plethora of indices which is the major attraction. The expenses charged to it is very low too. It is traded on the stock exchange like security. Liquidity is currently an issue in ETFs, though Fund houses have market makers for their ETFs.
Regular automated investments are not always possible and depend on the platform provider. Lastly, unified reporting along with other MFs is a problem as this data is from a different platform.
Also, until recently, actively managed funds in India were able to outperform Index funds. But, the tide has turned and index funds / ETFs have the potential to outperform actively managed funds. Hence, in spite of the downsides, this is expected to gain traction. In time, many more index funds will also get launched liquidity issues will also hopefully get addressed.
There is another category called Smart beta funds which are of recent vintage. These are somewhat tweaked versions of existing Index Funds.
For instance, a smart-beta fund can be created by tweaking Nifty 50 Index components and allowing the same weight for all underlying stock constituents. This smart-beta index is called the Nifty 50 Equal Weight Index.
There are many other smart-beta indices like Nifty 50 Value 20, Nifty 100 Quality 30, Nifty 100 Low Volatility 30, etc.
Many of these indices are seen to be performing better than Nifty 50 as this index is not truly reflective of the Indian economy the true dynamism may be better captured in a smart-beta index.
This data in Table 1 shows that Nifty 50 Value 20 has done wonderfully well across all time-frames, as compared to NIFTY 50.
Nifty 50 Equal Weight Index performance as compared to Nifty 50 is lower in one year period, significantly higher in 2 ; 3 year periods and marginally lower in the 5 year period, which indicates uneven performance and volatility.
In the above Table 2, we see that Nifty 100 Low volatility 30 Fund has done well across time frames. Even here, the Equal Weight Index is doing poorly as compared to Nifty 100 TRI.
The concept of Smart-beta is to apply a screen over an existing index and tweak it so that it can offer better returns as compared to the parent Index. This combines the benefits of a passive strategy with some element of active strategy as well.
The core indexing concept along with the optimisation overlay does not push up the costs much. These smart-beta funds are hence expected to operate at the efficient frontier of active passive strategies offering better risk-adjusted returns at low costs.
Most of the smart-beta indexes are today available for subscription only as an Exchange Traded Fund ( ETF ). Index schemes are not yet available, though it may make an appearance in the future.
The fact that Smart-beta funds are seeking to offer an excess return over the chosen base index by following some overriding strategy within the fund, bring in a certain element of risk.
For instance, NIFTY 50 Value 20 is a smart-beta index, created by casting a layer of financial parameters over NIFTY 50 like Return on Capital Employed ( ROCE ), Price Earnings Ratio ( PE ), Price to Book Value ( PB ), Dividend Yield ( DY ). This smart-beta index has done well across the tenures, till five years as compared to NIFTY 50 TRI.
This shows that these financial metrics are indeed relevant directly affect the price of the stock. Also, since the metrics are applied here based on predefined parameters, the fund manager subjectivity is avoided in this.
NIFTY 100 Low Volatility 30 is a smart-beta index constructed by assigning weights to the equities based on their volatility. The chosen 30 lowest volatile stocks are assigned the highest weight.
It is interesting to note that low volatility has such a high correlation to good returns in all time periods, up to five years. On the face of it, one would not have seen any direct linkage at all. But this smart-beta index has outperformed NIFTY 100 TRI across time frames.
Smart-beta fund risk is expected to be lower than that of an actively managed fund. In a portfolio comprising of actively managed funds passive funds, smart-beta ETFs will be positioned in between. Since it has the potential to beat the index at low cost ( less than 0.5% annual expense ratio ) the active strategy portion is just a well-thought-out formula, it makes sense to consider investing here. There are at least two credible ones as seen before.
Which other Smart-beta funds will be launched in the future is a factor of market maturity, demand for such products an enabling environment that supports the growth of such products. The moment for passive funds will come soon that is for certain.
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