personal finance

Preference for passive funds and ETFs is a palpable change


The market has posted impressive gains since it hit the bottom on 23 March 2020. Over this one year, from March 2020 to March 2021, we will look at the relative allocation to the various mutual fund categories. Please note, the AUM data is at market valuation. That is, when the market is moving up, even if there is net redemption on a cash basis from investors, the AUM still moves as NAV is valued at market prices. If it is net purchase on cash basis, it will add to the AUM.

In March 2020, equity AUM, as average of the month, was Rs 6.5 lakh crore (INR 6.5 trillion). The two categories with highest allocation were multi cap funds (Rs 1.27 lakh crore, 19.6%) and large cap funds (Rs 1.26 lakh crore, 19.4%). In March 2021, equity AUM as average of the month moved up to Rs 9.83 lakh crore, driven largely by the market upside. The highest allocation was to large cap funds (Rs 1.8 lakh crore, 18.4%).

In multi cap funds, due to the change in rules and re-categorisation, there was confusion in the market for some time and the market has gradually moved over to flexi cap funds. In March 2021, multi cap funds had an AUM of Rs 20 thousand crore (2%) and that for flexi cap funds was Rs 1.6 lakh crore (16%). These two categories should be seen together now, as it is the earlier multi cap category split between flexi and multi now. The AUM is Rs 1.8 lakh crore, representing 18.3% of equity AUM. Hence, seen from this perspective, there is not much of a change on relative allocation to the two largest categories: large cap and multi/flexi cap funds.

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The other major categories are ELSS, which has moved from Rs 83 thousand crore (12.8%) in March 2020 to Rs 1.25 lakh crore (12.8%) in March 2021 and mid cap funds which has moved from Rs 76 thousand crore (11.7%) to Rs 1.16 lakh crore (11.8%). That is, the relative allocation remains the same over the year.

Similar trend is observed in other categories as well: sectoral / thematic funds have moved from 8.5% of equity allocation in March 2020 to 9.9% in March 2021; large and mid cap funds have moved from 7.5% of equity AUM in March 2020 to 7.8% of AUM in March 2021.

If the allocation ratio remains similar, as a percentage of equity AUM, is everything the same as one year ago? There has been one change: ETF AUM has moved up. In March 2020, the AUM in ‘Other ETFs’ was Rs 1.56 lakh crore (INR 1.56 trillion). Other ETFs, in AMFI’s terminology, means other than gold ETFs and mostly comprises equity. While there are a few debt ETFs as well included in this number, there is another component in AMFI data, Index Funds, which also is mostly equity, which is separate. Hence, for the sake of discussion, let us say equity ETFs, which was Rs 1.56 lakh crore in March 2020, has moved up to Rs 2.78 lakh crore in March 2021. As a percentage of equity AUM, it has increased from 24% (of Rs 6.5 lakh crore) to 28% (of Rs 9.83 lakh crore).

What do we observe from the above trend? Various sub-asset classes within equity have moved in more-or-less the same proportion over the years. Increase in preference for passive fund management is the only palpable change.

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Redemptions from equity mutual funds have happened during the year. While part of the redemptions is profit booking, part of it has found its way directly to the equity market. Though there is no data to establish this flow from mutual funds to direct equity, the significant increase in the number of demat accounts over the year and the number of trading accounts with online (app based) broking services is a pointer. Investors, for their allocation to the categories of funds and particular schemes, should consult an adviser / distributor, for guidance.

(The writer is a corporate trainer and author.)



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