The Securities and Exchange Board of India (SEBI) is planning to bring new mutual fund regulations for passive funds. A working group has been formed for the formulation of the passive regulations, Anant Barua, whole time member, Sebi told CNBC TV18 on the sidelines of Assocham Mutual Fund Summit in New Delhi.

“At the moment, passive fund have to follow many rules that are not relevant to them. This is because the rules and regulations are primarily focused on active funds. We are working to reduce some regulation for passive funds,” said Barua.

The assets under management (AUM) of passive funds have gone up dramatically in the past few years. Launch of new schemes like target maturity funds, Bharat Bond etc have increased the penetration of passive funds among Indian investors.

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However, the regulations are not focused on passive funds. Sebi believes that passive funds have to go through many regulations that are not relevant to them. So, Sebi is looking to reduce some rules and regulations for passive funds.

According to Association of Mutual Funds in India (AMFI), the total AUM of passive funds grew 34 percent to Rs 6.97-lakh crore as of March 2023 as against Rs 5.21-lakh crore in March 2022

"The momentum has picked up with a rampant belief of massive underperformance of active funds v/s passive funds. The growth has been led by strong flows into both ETFs and Index funds, wherein cumulatively over the past four years, the net inflows into these categories were at Rs 3.9 lakh crore. This is exactly the same as inflows into the equity segment," a report shared by Motilal Oswal said.

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Over the past five years, AUM growth of ETFs/Index Funds in India stood at 38 percent/129 percent as compared to active equity schemes CAGR of 17 percent. Cumulatively, over the past four years, the inflows in ETFs and index funds have been to the tune Rs 3.9 trillion, which is exactly in line with the inflows in the active equity segment.

"The flows, however, are predominantly from corporates (including EPFO) and HNIs. Retail investors remain elusive from this space as a large portion (75 percent) of retail assets are still garnered from the distributor channel. Passive investments are comparatively more attractive than active investments owing to their ease of investing, better liquidity, and lower cost. In the terms of returns, our analysis shows that the 1-year, 3-year and 5-year returns for large cap active equity schemes and ETFs are not materially different," the report said.

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First Published:May 26, 2023 12:39 PM IST