Passive investing continues to climb in India, with a CAGR of 49% over the last decade. As regulations and markets continue to evolve, how large is the potential of passive in India and what strategies are in the mix that could fuel this upward trajectory?
1. What are the main drivers of passive investing in India?
Koel: The passive investment space is in its nascent stage in India, though it is growing steadily. At over USD 25 billion assets under management and nearly 86 products, this space accounts for a small percentage of the USD 6 trillion global passive market. The potential of passive is slowly being unleashed through education and awareness, along with government support. The Employee Provident Fund’s allocation to ETFs and the disinvestment program routed through the same passive option has created the opportunity for more visibility and understanding for investors. Further, the underperformance of active funds in particular categories reflected in our bi-annual S&P Indices vs. Active (SPIVA®) research, continues to fuel interest in passive strategies in the region.
2. What kinds of passive strategies are Institutional Investors using in India and where do you see potential for future innovation?
Pratik: Asset managers in India have embraced passive innovations, using strategies designed to access sectors and industries like banking, and themes including Environmental, Social, and Governance (ESG) and consumption are gaining traction. Smart beta (or factor-based investing) as a category has also seen continued innovation, both in single- and multi-factor strategies. The biggest impediment for the success of passive funds has been education and awareness. With higher awareness, we would expect interest in traditional index-based and smart beta products to increase in the future. Vanilla products may have a larger role to play in building the marketplace before more innovative products take off. Due to regulations and liquidity factors, large-cap ETFs are currently the preferred passive instruments for institutional investors.
3. Can you discuss the importance of diversification and how indices can inform asset allocation decisions?
Koel: Diversification is a well-established investment approach for minimizing risk. Indices provide an ideal avenue for assessing the performance of a market segment and, when underlying an index-based product, for accessing a basket of securities that is aligned with an investment objective thanks to the transparency of S&P DJI’s index methodologies. Indices cover a wide range of market segments and strategies that vary from regional equity benchmarks like the S&P 500® for the U.S. and the S&P BSE SENSEX for India, sectors like Healthcare and Information Technology, factors like low volatility and quality, different asset classes, or strategies combining factors, or those tracking themes such as dividends.