63 new passive mutual funds launched in past 7 months, why are they getting popular among investors?

In the past seven months of this calendar year, a total of 106 new fund offers (NFOs) were launched across mutual fund houses. These NFOs comprised 25 thematic and 31 index schemes, reveals the AMFI (Association of Mutual Funds in India) data.

Out of these new schemes, 63 passive schemes were launched in the first seven months vis-à-vis 51 in the entire last year, reveals Ace Equity MF data.

Passive mutual funds are the schemes which replicate the performance of an index, and are managed passively by fund managers. They are typically more popular among investors because they are more cost-effective and easy to understand. Importantly, most active mutual funds fail to beat the benchmark, anyway. Therefore, investors tend to lap up passive schemes.

Sridharan Sundaram, a SEBI-registered investment advisor and founder of Wealth Ladder Direct believes, “Most of the new launches are thematic mutual funds in such sectors as manufacturing, business cycle fund and defence. There are quite a few reasons for this including the rallying of markets. Although the market is still overpriced, the sectoral rotation will happen. So, those investors who are looking for a buying opportunity can invest in sectoral funds. And if you want to invest in a benchmark index, you should invest in a staggered manner and not in one shot.”

Additionally, passive funds do not necessarily replicate benchmark indexes. There are a number of passive funds which track a particular sector or theme such as defence, consumer durables or infrastructure, among others.

“As more and more investors understand that generating alpha for a longer period from active mutual funds is not easy, they are more interested in passive mutual funds which are very cost-effective and a no-brainer for the investors. But somehow such investments are boring so to attract more and more investors, mutual fund companies apply new marketing strategies by offering sectoral/thematic passive funds. They are also coming up with Smart Beta funds to generate some alpha over plain vanilla passive funds,” says Preeti Zende, a SEBI-registered investment advisor and founder of Apna Dhan Financial Services.

In the month of July alone, 15 new schemes were launched comprising six index funds, six ETFs, two thematic and one multi cap. In the preceding month of June, 17 schemes were launched comprising 9 thematic funds, three ETFs and two index funds. In May, nine schemes were launched comprising 4 index funds, three ETFs and one thematic fund.

When seen Quarter-wise, a total of 35 schemes were launched in the April-June quarter alone which comprised 11 thematic funds and 12 index funds. In March quarter, meanwhile, 56 mutual funds were launched comprising 13 index funds and 11 thematic funds.

Old wine in the new bottle?

Some wealth advisors believe that the fund houses launch new schemes to draw more investors and inject fresh money into the market since inflows into existing schemes continue to decline over time

“Fund houses have to invest in new strategies to attract new clients in the market. When the fund is old its inflow may reduce but any NFO with current sectorial flavour like defence, infrastructure, energy or even with name opportunities fund can attract new money in the market,” adds Ms Zende.

Meanwhile, she does not advise investors to opt for an NFO since one does not have any historical performance based on which one can assess the fund. Additionally, the risk gets even higher when you opt for a thematic fund.

“I never advocate going with any NFO as investing in the existing MF with a good track record of its performance is always prudent, which we can study and compare,” she adds.