It is not a sideshow any more. Passive is where the action is in India, and we are seeing this happen at a clip that puts global norms to shame. If you were at the ET Alpha Wealth Summit, you would have heard JioBlackRock’s Sid Swaminathan make the case for why India’s turning point is here sooner than anyone put on the calendar.
Passive takes the pole position
There are numbers to back it up. A decade back, index funds and ETFs made up about 6% of the mutual fund space. Today, they are in the 25% range, as Swaminathan will tell you.
The headline for him is the velocity of it all. You look at other, more established markets and it was a 15- to 20-year process. India is putting that in a single decade.
Why active managers feel the heat
Don’t make it just about the price tag. For Swaminathan, it is a matter of whether you can deliver. Put 18 months of anemic equity returns in front of an investor and they start to wonder if an active fee is worth it.
It comes down to results. Over 70% of largecap funds are not making good on their promise of alpha versus the benchmark. That kind of underperformance is what is pushing people to the low-cost, rules-based side of the table.
Three accelerants reshaping the market
So why is India outpacing its peers? Swaminathan sees three drivers to the passive wave:
– The market is more of a grown-up and more efficient
– After flat returns, fees are being put under a microscope
– Most largecap funds are coming up short on alpha
He is quick to add that this isn’t a nail in the coffin for active investing. It is simply a sign of a more discerning investor with better tools to suit their risk profile.
Multiple Indias, one timeline
You have disruption at every level of maturity. Having returned from the UK a couple of years ago, Swaminathan has seen a market where the novice and the veteran are both moving forward, though they want very different things.
On one side you have first-timers getting into the habit of SIPs. On the other, you have the fully invested who are now in your office to talk about debt, or how to get some global and alternative exposure.
What investors are asking next
The inboxes of advisors have been full of a new kind of question, he says. It is less about which stock to pick and more on how to put together a portfolio that can stand up to any cycle:
– Striking a balance between a passive core and an active satellite
– Figuring out the right time for some global or alt assets
Digital rails and the scale effect
Then there is the digital stack, which is an accelerant you don’t see so much elsewhere. Swaminathan points to an ecosystem that is opening up access and teaching the ropes to a lot of people. It is what is propelling the industry in India.
It is more than just a way to sell. It lets an investor go from simple savings to a proper allocation in no time and see how it is panning out as it happens.
A new allocation reality, debated
This was the topic of a panel at the ET Alpha Wealth Summit, ‘Global or Local? The New Allocation Reality’. We had some heavy hitters like Devina Mehra, Lakshmi Iyer and Rahul Jain in the room with Swaminathan to put their spin on public markets and wealth management.
But it was his take on the clock that was the most striking. “The pace with which investor behaviour is changing feels a lot faster than it has happened elsewhere in the world,” he said. India is a case of years, not decades.
Implications for strategy and competition
Fund houses can read the writing on the wall. If you are going to be an active manager, you need to have a mandate or a niche that makes the fee defensible, because the broad index is going to have the core business.
For the client, it is a matter of building the right portfolio. And as for us, Swaminathan says we have to be smart about how we educate them; a blanket pitch doesn’t work anymore.
What comes next
We have seen passive go from 6% to 25% in a decade. The question is how the rest of the industry adapts. In Swaminathan’s eyes, you have to have a different plan for each of the markets we have here.
He would have you believe that is a good thing. With the digital side of things making everything more accessible, India is set to be one of the most interesting places to be in asset management, if only because the curve is so steep.
