ETFs, a popular choice for passive investing in mutual funds, are experiencing slower asset growth compared to the overall mutual fund industry for the first time in a decade. The growth of ETF assets under management (AUM) has increased by 17% in 2023, while the overall mutual fund AUM has grown by 23% (till November).
This shift marks a change from 2013, when ETFs saw a decline in AUM by 11% despite the industry’s 9% growth. Passive funds, including ETFs and index funds, have been rapidly growing within the mutual fund industry, particularly after the Covid-19 pandemic. The AUM of passive funds has surged from Rs 1.85 trillion in December 2019 to Rs 6.3 trillion by the end of 2022, with annual growth rates exceeding 30% during this period. In 2023, the passive AUM growth is slightly lower than the industry at 22%.
While ETFs are gaining traction among retail investors, they continue to be primarily used by institutional investors, with the Employees’ Provident Fund Organisation (EPFO) being the largest client. However, there has been a slowdown in ETF AUM growth, likely due to a decline in EPFO flows or redemptions by the retirement fund body. Changes in debt fund taxation and a growing asset base for ETFs have also contributed to this trend.
At the end of October 2023, equity-oriented ETFs had an AUM of Rs 4.5 trillion, while debt ETFs were managing Rs 90,130 crore. Meanwhile, index funds have experienced significant growth, with their AUM reaching Rs 1.9 trillion in 2023, a 48% increase from the previous year. The growing interest in passive funds is driven by lower costs and the inability of fund managers to consistently outperform in certain categories.
This shift in ETF asset growth reflects a changing landscape within the mutual fund industry and is an important trend to monitor in the coming years.
Historically, the rise of ETFs and passive investing has challenged the traditional approach to mutual funds, leading to increased competition and diversification within the industry. As investors continue to seek cost-effective and reliable investment options, the trajectory of ETF asset growth will be a key indicator of the overall direction of the mutual fund landscape.
In conclusion, the slowing growth of ETF assets under management highlights the evolving dynamics of the mutual fund industry, signaling potential shifts in investor preferences and market trends. As the industry continues to adapt to these changes, monitoring the performance of ETFs and passive funds will be crucial for investors and industry stakeholders alike.
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