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00:00Hi, thanks so much for joining in.

00:09You're watching the Mutual Fund Show on NDTV Profit and my name is Alex Mathieu.

00:13This show gets you actionable insight to everything related to mutual funds, so whether it is

00:18the right portfolio to build or which scheme to choose, you'll find answers right here.

00:24And by the way, let's pull up that number on the screen if we possibly can.

00:28That's where you can send us your queries in case you've got questions on the mutual

00:33funds that you have or the ones that you intend to buy or invest in and make sure to tell

00:39us your goals when you write in your questions so that we can address them with the knowledge

00:44of why you need the money.

00:46But on today's program, I want to focus on passive investing.

00:49Now it's fairly discussed, we've had a fair amount of conversations about the usage of

00:58passive and how useful it is, but let's draw the line under how you should actually employ

01:04the strategy.

01:05And a lot of people have spoken about how it should be part of your core portfolio.

01:10We'll talk about that as well, the benefits of doing that.

01:13Vishal Jain, who is the Chief Executive Officer of Zerodha Fund House is joining me on this

01:19conversation.

01:20Vishal, thanks so much for taking the time and pleasure having you.

01:23You are part of a fund house that has chosen to embrace passive wholeheartedly.

01:28So it's the only type of product that you offer.

01:33And I would think that's because you feel that that's a strong way to create wealth

01:38over the long term.

01:40Can you take us through the thinking as to why you only offer passive?

01:46I think one of the large motivation factors for us to go the only passive way is to help

01:52increase penetration.

01:53So if you look at penetration at this point of time in the industry, we're touching approximately

01:59about 5 crore unit portfolios in the industry.

02:04And in our opinion, penetration is quite limited at this point of time.

02:09If you want the next 10-15 crore guys to start using mutual fund products to build better

02:17financial outcomes for themselves, then you need to introduce products which are very

02:21simple.

02:22And I think passive products are the ones that tick all those boxes.

02:25I mean, they're transparent, they're low cost, they're easy to understand.

02:29And I think that's the main objective why we have decided to use passive products in

02:34our strategy.

02:36The cost of oversimplifying this, I do want to mention, and of course, a lot of you tuning

02:42in on the various social media platforms and on television will know the difference between

02:47passive and active.

02:48But I'd like to keep this as open as possible and, you know, reach out to as many people

02:54as possible.

02:55So very simply put, a passive strategy is where the fund manager does not choose individual

03:01stocks.

03:02The strategy simply mirrors an existing index.

03:06So if you've got questions, by the way, on that, you can write to us and we will simplify

03:10it further.

03:11But at this point, we assume that you know what we're talking about.

03:15Let's talk about whether or not this can form part of a core strategy.

03:20Vishal, I understand that your contention is that it very much can and should, but there

03:25are caveats here, right?

03:29No, I think, see, there are, well, why does one invest in equity?

03:34I think, let's get back to that.

03:36I think, I see two main reasons.

03:40One is that, you know, most of us are bullish about the country and we want to sit on the

03:45Indiago story.

03:46And the second thing is to beat inflation, right?

03:49And in the process of doing that, you know, that's why we invest in equity.

03:54And why, see, a passive fund becomes an important piece of that pie simply because it's a low-cost,

04:01simple strategy for you to take exposure to the Indian markets.

04:04The biggest benefit of passive is the fact that whether it was 20 years back or whether

04:09it's 20 years ahead, right, you will always be invested in the best companies that are

04:14there in the Indian market.

04:16And it's a low-cost and transparent strategy as compared to any other strategy that is

04:20there in the market.

04:21So, a strategy like a passive strategy or a well-diversified basket is something that

04:26should form the core of your portfolio, right?

04:29And I always go and tell people that, look, there will always be times when you believe

04:35that there may be some other strategies which may generate better returns, but you can kind

04:39of build your portfolio in a core and satellite kind of a manner where the core becomes a,

04:46you know, becomes a main part of your strategy.

04:48That is, you want equity returns.

04:51And the satellite part, which is, say, the smaller part of your portfolio, is where you

04:55can actually take exposure to alternative strategies, right?

04:58And people can kind of use this approach in a very disciplined manner to be able to get

05:04benefit of both worlds, actually.

05:07Let's pull up some data because I asked my team to pull up some performance indicators

05:13and we basically looked at the 10-year performance of the passive category of mutual funds.

05:20And most of these are going to be either Nifty 50 funds or Nifty Next 50 funds or the Nifty

05:28100 funds because only off late you had the broader gauges being announced and launched,

05:35but the best performer is the Nippon Next 50 fund over the last 10-year period, 16.8

05:43percent return, and the broader gauges have actually not necessarily beaten that.

05:49So the 100 ETF has actually done 13.7 percent or thereabouts.

05:53And we also have actively managed large-cap fund performers and we've looked at the top

05:5810 or the top five performers here.

06:01The Nippon India large-cap fund has made about 15.7 percent in that same period.

06:08Vishal, you pointed out that cost is a major factor here.

06:14In order to consistently outperform the passive and also the benchmark, you would have to

06:22have a differential of what, 1.5 percentage points for an actively managed fund, which

06:27is very hard to get, right, consistently?

06:32Yeah.

06:32So if you look at most passively managed funds, whether they're ETFs or index funds, most

06:39of them range between 0.05 percent to about, I would say, 0.25 to 0.3 percent or so.

06:48Though TERs have come down on the active side, so on the large-cap side, you will find that

06:53TERs have now come to 0.6, 0.7 percent, but on an average, most active funds have a TER

06:59ranging to about 1, 1.25 percent or so, especially if you go towards the mid-cap, flexi-cap and

07:06other categories that are there.

07:08Now assume that there is a fund where your expense ratio is, say, 1 percent and you have

07:14a passive fund, which is, say, at 0.25 percent.

07:17Every year, 0.75 percent is what you are saving or is the additional part of your funds that

07:24are getting invested in the market.

07:26Now look at it over a longer period of time.

07:28I mean, that 0.75 percent into 10 years becomes 7.5 percent of additional money, your money,

07:34which is getting invested in the market.

07:35And that's how an expense ratio, lower expense ratio, benefits investors in the long term.

07:42I also want to point out the number of schemes that are currently offered.

07:48And after that, I have a quick question on when the outperformance takes place.

07:54Obviously, the most offered product is the Nifty 50 index, and 37 AMCs are currently offering it.

08:0320 AMCs are offering the Nifty Next 50.

08:06The Sensex Index Fund is offered by 20.

08:09The Nifty Bank, there is an offer of 13.

08:11And the Nifty Mid-Cap 150 Index is offered by 12.

08:16There are two or three that are offering the absolute broadest gauge, which is the 500 right now.

08:23And that is actually done reasonably well over the last five years.

08:28Vishal, I'm actually curious about what you have to say about this.

08:32Largely, it's been seen that the outperformance of a passive strategy takes place when there is a bull run,

08:38when there's a move upwards.

08:41The downside protection is always highlighted as a bit of a sticking point in why maybe an active would score better than a passive.

08:50How do you balance that?

08:53So I think your question or your statement is loaded in many ways.

08:58The first thing is, you know, you mentioned that Nifty 50 is where a lot of the schemes are.

09:06I'd like to highlight that if you looked at, you know, the Indian economy as a whole,

09:12you would find that all the way up to about 2013 to 2014 or so,

09:17you found that large caps are the ones that were kind of outperforming most of the segments of the market.

09:22Post-2014, it was when the mid-cap started doing well and now people have actively started looking at the small cap.

09:29So therefore, you'll find that a lot of AUM is loaded towards the Nifty 50

09:34because historically, that's where the money has been invested in, in the Indian context, right?

09:40In terms of your, you know, your question on whether in a downward market,

09:47passive, you know, or an active strategy will outperform, very difficult to say, Alex.

09:53First is, how do you define or when do you get to know that there's a downward market coming?

09:58It's only once it happens and you get to know.

10:01The second thing is, even if there are schemes that have outperformed, you know, the benchmark,

10:06it's difficult for you to have picked the right scheme, right?

10:09And you will get to know only when you look at data, which is in hindsight.

10:12If somebody came and asked you that if the markets will fall,

10:16which is that one scheme that one or two schemes that you should pick up in a downward market,

10:21it's very difficult for you to kind of pick and choose.

10:24And how do you pick and choose?

10:25I think that's a big question and dilemma that anybody has.

10:30It's a fair point.

10:32But what about the point about now, obviously, we've moved quite a far distance from 2014.

10:39Even over the last year, Vishal, I'm talking about actively managed, of course,

10:43because I was looking at that data the most recently.

10:46Maybe you can tell me about the passive assets under management.

10:49But active equity assets under management have risen by over 60%

10:53between September of last year and September of this year.

10:56And there's an increase.

10:56Obviously, the underlying has also gone up.

10:59But a sizable amount of investment has taken place.

11:01Passive has also grown tremendously.

11:03What about the products that are currently being offered, though?

11:06And there are a lot of offers in the factor-based, in the smart beta, as they call it.

11:12What do you think about that as well?

11:15So again, one thing about your first question in terms of growth of active versus passive.

11:22Remember one thing, Alex, passive products are bought, they're not sold.

11:27Generally, when you look at it from any angle, whether you look at ETFs or whether you look at,

11:32say, even the index fund structure, typically, distributors will tend to sell,

11:38I mean, products which have higher distribution commissions and passive products

11:42because of the low TERs will generally have lesser in terms for the distributor, right?

11:48And therefore, passive products are always products.

11:51And that's not only in India, it's across the globe,

11:54where passive products are bought, they're not sold.

11:58So that's the first thing.

11:59The second thing is in terms of newer products coming into the market,

12:04yes, there are, if you see the current trend, a lot of factor-based products,

12:09a lot of thematic products are coming into the market.

12:11But as I said, it's important for investors to be disciplined about their portfolios.

12:17Important to split your portfolio in a kind of core and satellite kind of an approach

12:22where core, the larger part of your portfolio,

12:25you take exposure through a plain vanilla diversified index fund or an ETF.

12:30And the satellite part of your portfolio could be invested in any of these thematics

12:35or active funds or any of these factor-based products

12:39because any of these factor-based products or thematic products,

12:43nobody can tell when these products will do well

12:47because different factors kind of move at different points of time,

12:50different thematics or different sectors move at different points of time.

12:54You get back again to the question in terms of how do I pick the right fund manager,

12:58the right sector, the right stock.

13:00And in your whole quest of doing that,

13:04you end up losing the simple pure market returns.

13:06And therefore, I would always suggest that a larger part of your portfolio

13:10should be through a plain vanilla diversified low-cost ETF or an index fund.

13:15And the smaller part of the portfolio is which you can look at

13:19to investing in any of these other alternate strategies.

13:22Point taken.

13:24And by the way, I only spoke about the growth in AUM of active

13:28because I remembered that data, I was looking at it.

13:31I'm sure that passive has also grown quite tremendously.

13:34I was looking at index funds and they've grown quite tremendously

13:37over the last several months also, Vishal.

13:39So not to detract from that at all.

13:42But the last point that I want to ask you is

13:46if we have established and you have made a strong case for it,

13:50that the core should be passive.

13:52What product is the best or should you have a combination of products?

13:56Nifty 50, of course, has been the traditionally sought out option.

14:00But as we've seen, there are certain other options that have actually done better.

14:06I think it all depends on in terms of how glued in you are with your portfolio.

14:12If you're a person who's actively managing your portfolio,

14:16then you could have a combination of a Nifty 50, a Nifty Next 50,

14:20a Mid Cap 150, right, in the ratio that you want.

14:23If you're a person who likes a, you know, a filtered,

14:26shuttered kind of a portfolio,

14:29then one could just look at maybe a more diversified portfolio,

14:33like a top 250, which has a top 250 companies in the index

14:37or a Nifty 500, which will also have then small caps in it, right?

14:41So depending on your, I think, needs and depending on how,

14:46you know, active you are managing your portfolio,

14:49or if you just want something simple, I mean, you could kind of take your pick.

14:54That's a fair point.

14:55Vishal, thanks so much for joining in and for giving us that perspective

14:59and interesting conversation to say the very least.

15:02Thanks so much for inviting me, Alex. It was a pleasure.

15:04My pleasure.

Passive Strategy For Long-Term: Why It Works? | All You Need To Know On The Mutual Fund Show

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