HDFC AMC joins the passive investing race with nine new ETFs

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At a time when several fund houses are entering the passive fund industry (like Zerodha, Navi, NJ Invest) and the industry is becoming more competitive, HDFC AMC has also entered the space by depositing nine new exchange-traded funds ( AND F).

According to reports, the ETF space saw assets under management double from Rs 1.54 lakh crore at the end of FY20 to Rs 2.9 lakh crore at the end of FY21.

The passive fund space has seen several new funds multiply in a short period of time. The latest fund company to enter the space is HDFC Asset Management Company. He deposited nine new exchange traded funds (ETFs) that would play on different themes such as low volatility stocks, dynamic stocks, quality stocks and even across different sectors.

According to the Securities and Exchange Board of India website, HDFC had not requested any new funds between December 2018 and August 2021. But of the twelve funds registered between September and October 2021, only one appears to be an actively managed fund indicating that HDFC serious interest in passive space.

This decision comes at a time when several fund houses are entering the passive fund industry and the sector is becoming more competitive. For example, stock broker Zerodha has received approval from Sebi for a new fund while another discount broker, Samco, has already applied for a new mutual fund. Navi, backed by Sachin Bansal, has already entered the industry with extremely inexpensive passive funds.

The ETF space saw assets under management (AUM) double from Rs 1.54 lakh crore at the end of fiscal 2020 (fiscal 2020) to Rs 2.9 lakh crore at the end of fiscal 21 , according to a report from SEBI. Assets under management refers to the total investor money held by mutual funds.

A passive fund invests in an asset class by investing in a basket of securities that clones an index. The fund manager does not actively research or select stocks. Passive funds became popular after sustained underperformance by active managers, especially after Vanguard introduced index funds. Since then, different passive funds for various themes and asset classes have emerged.

A passive fund is based on the idea that reducing the churn rate of a portfolio and sticking to a long-term strategy should generate more wealth than active investors over the long term. The idea is based on the assumption of an efficient market, whose proponents believe that all information is updated in the stock price and therefore the markets cannot be beaten.

In a mature market like the United States, passive funds account for almost half of market entry, while the figure in India is much lower. However, with several active funds charging high fees while continuing to underperform, investors might prefer to turn to passive funds.

However, given the low overheads and a standardized product, the only way to differentiate one passive fund from another is to lower the fees. As a result, some passive funds have seen their fees drop to zero in the US.

Navi has increased the pressure in the index fund space by offering a Nifty index fund with an expense ratio of 0.06%. Other funds in the space had seen an increase in index fund fees just a few months ago, but they may need to cut.

Navi has already filed documents with SEBI for new passive funds. Likewise, NJ Invest, which is India’s largest mutual distributor, has also launched rule-based passive funds. Zerodha also plans to focus solely on the passive fund space.

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