Another hype cycle in funds

Passive funds - index funds of one sort or another as well as ETFs - are getting a great deal of attention, and this attention is constantly increasing. If you read the financial media as well as generally keep an eye on investments-related parts of social media, you get the impression that a passive fund revolution is well on its way. Most AMCs have a larger and larger bouquet of passive funds, and there has been a rush to launch new passive funds. Some AMCs have started focussing almost entirely on such funds, and one new AMC has been launched which has promised to be 100% passive. Since this new AMC - Navi - has been started by Flipkart founder Sachin Bansal, it has garnered a fair amount of attention, a lot of which has spilled over to the concept of index funds and ETFs.

However, when I talk to actual small investors, this enthusiasm - or even interest - in passive funds is missing. Yes, some people are aware of it. The more well-read and experienced investors are more aware of it, but there's a kind of a disconnect that the passive cheerleaders seem unaware of. Here's what it is. The ordinary equity investor is an inveterate optimist as well as an optimiser. On the other hand, passive funds come across as a defensive and 'good enough' option. The two ways of thinking do not have an easy meeting ground. Reduced to its essence, the passive fund logic looks like this to such an investor: No matter how hard you try, you won't be able to do better than the index, so don't even try. Just accept that market returns are the best you can get. The optimistic spirit of the equity investor has little affinity for this kind of an idea. All in all, the enthusiasm for passive funds is a sort of an intellectual, top-down exercise rather than a product design response to an investor's needs.

However, the current wave of passive products that are hitting the Indian mutual fund investor is not even this. Actually, these funds are nothing but a cynical marketing ploy by mutual fund companies. The whole point of passive investing is that investors don't want to get involved in evaluating the performance of hundreds or even thousands of actively managed funds. Instead, passive funds give an attractive option of just 'buying the market'. You can just invest in, say, a Nifty index fund and just forget about it. You don't even have to worry about which AMC - as long as such a fund is a certain minimum size and low expenses, it can be from any AMC at all.

Sounds good, right? However, such a scenario would be a nightmare for the mutual fund companies. Which business would want its product line-up to become a commodity? What's more, it remains much easier to sell new funds than to build up a set of regular investors in older, established funds. Not just that, under SEBI's new fund categorisation system, more than one fund cannot be launched in the core categories, so the fringe, specialised categories are now seeing this 'innovation'. So what we have instead is a fast-growing zoo of specialised passive funds. The responsibility of choosing which fund to invest in and how much weightage to give to each is now yours. With active funds, you had too much choice to deal with. To solve the problem, there's even more choice now!

The strange thing is that when I look at individual investors' actual financial goals and how they can achieve that, the answer is never about just the right type and subtype of fund that they could choose. Instead, the answer is, as always, invest in a few simple diversified or balanced funds with good track records, start early, invest every month and don't stop. The solution for meeting your financial goals always lies first in optimising your own actions, and only later in bothering about the outside world.