Over the past few months, we have witnessed mutual fund houses launch a growing number of new mutual funds, mainly in the passive investment style category, such as Exchange Traded Funds (ETFs), Index Funds, and Fund of Funds (FoFs). According to AMFI data, from January to June 2023, about 81 open-ended NFOs have been launched. These 81 new funds offer, including debt NFOs, mobilised Rs 19,926 crore.
In my previous article – New Mutual Funds Launched in 2023: Which Ones Should You Invest in? I have mentioned in detail the newly launched mutual funds in 2023 and how investors should approach these NFOs.
Graph 1: NFO launched – Active vs Passive Mutual Funds
Data as on Aug 07, 2023
Mutual funds’ NFOs collection was at nearly 20,000 crore in 2023 so far, while the same was Rs 62,187 crore in 2022, Rs 99,704 crore in 2021, and Rs 53,703 crore in 2020 in terms of fund mobilisation.
In the realm of investments, one often encounters a crossroads – Active or Passive investing? Both approaches have their distinct features and cater to different investor preferences. The popularity of Passive Funds in India has been on the rise, however, there has been a certain level of decline in Active Mutual Fund NFOs in the past few years, as you can see from the graph above.
The dynamics of the mutual fund business are impacted by a variety of internal and external variables; therefore, the causes of the decline in Active Mutual Fund NFOs may be a mix of these factors.
Here are some of the reasons why fund houses are wary of launching active schemes in 2023:
- Increasing Investor Interest –SEBI’s norms on categorisation of mutual funds to ensure that schemes remain true to label also created challenges for actively managed funds to create alpha since it limited the universe of stocks from which a scheme belonging to a particular category can invest. Due to this, a sizable proportion of actively managed mutual funds have struggled to provide persistent alpha and have underperformed their respective benchmark indices. As a result, investors’ interest in passively managed funds has increased, which has prompted fund houses to introduce passive NFOs. The NFOs are launched to take advantage of the investor’s sentiment and draw in their investment at that moment.
- Plethora of Choices Under Passive SchemesIn the past, the majority of passive equity funds only tracked a small number of industries, including banking and large-cap indices like the Nifty 50 and S&P BSE Sensex. To assist investors in building a diverse portfolio, mutual funds in the past few years have introduced Passive Funds that follow several categories (Equity, Debt, Gold), unique themes (ESG, Global, Artificial Intelligence), industries (Pharma, IT), as well as other cutting-edge products. According to SEBI, the capital market regulator, mutual funds are also be permitted to offer passive equity-linked savings schemes (ELSS) as of July 01, 2022. This extensive selection of passive fund alternatives has increased demand and encouraged mutual funds to introduce more passive than active investment strategies.
- Maximising the Returns for Existing InvestorsAnother reason for a decline in the launch of active schemes could be that the AMCs are concentrating on managing and promoting their existing schemes rather than launching new ones. With a wide array of existing mutual fund schemes, fund houses are slowly launching new ones in a highly competitive landscape (59 filed draft documents for new fund offerings (NFOs) in the first seven months of the year). The fund house may enhance returns for current investors while maintaining steady assets under management by putting a strong emphasis on improving the returns of existing schemes.
- No Restrictions on the launch of Passive SchemesAs mentioned earlier, there are certain challenges when it comes to introducing new actively managed mutual funds. After the categorisation and rationalisation of mutual fund schemes by the capital markets regulator, SEBI AMCs have no restrictions on the number of passive products they can launch. In contrast, there are limits on other types of funds they can manufacture. The majority of passively managed funds follow a certain index to provide returns comparable to the benchmark’s performance; this minimises fund management intervention. On the other hand, Actively managed schemes have additional restrictions because they necessitate the fund manager’s active involvement.
Apart from this, the current market reaching an all-time high could be another reason the fund houses are cautious about launching Active NFOs. During such periods of elevated market levels, mutual funds may anticipate the possibility of a market correction or downturn.
The Securities and Exchange Board of India (SEBI) reports that between January and July 2023, 59 draft scheme information documents (SIDs) were submitted. In August 2023, two draft documents have already been filed by fund houses – WhiteOak Capital Mutual Fund and Bajaj Finserv Mutual Fund. Additionally, paperwork supporting both passive and active investors have been filed in the index and ETF categories.
What does the decline in Active Mutual Fund NFOs mean for investors?
Currently, the retail investor segment’s mutual fund holdings have increased by around 20% yearly, close to Rs 25 lakh crore. Investments in equity schemes, Exchange Traded Funds (ETFs), and Funds of Funds (FoFs) during a bullish market helped to drive this rise.
Up to this point in 2023, the mutual fund market has seen the introduction of equity NFOs in the Multicap, Flexicap, and Thematic/Sectoral categories. The AMCs have filed schemes in both active and passive categories this year. However, in 2022, the maximum number of funds launched in the Index Fund segment was 84, followed by 49 Fixed Maturity Plans (FMPs) and 39 other ETFs. Active scheme launches in 2023 have been somewhat sluggish up to this point.
Now given the current market high and the flow of Passive Mutual Fund NFOs, many investors are puzzled about whether to invest or wait for a market correction. Will passively managed NFOs be a good fit for investment portfolios? Investors may consider investing in new mutual funds launched in 2023 only if they are a suitable option for their portfolio based on the risk profile, investment horizon and goals. Thus, there are certain things that every investor seeking to invest in NFOs must consider.
Having said that, Passive Funds vs Active Funds differ in their investment strategies; ultimately, the decision between investing in Passive Funds or Active Funds depends on an investor’s financial situation, goals, and investment philosophy. Therefore, the decline in active mutual fund nfos may not be the basis for investment in passive schemes. One must ensure their suitability before investing in any new mutual funds launched in 2023.
This article first appeared on PersonalFN here