The mutual fund industry is clearly in an NFO (new fund offer) frenzy right now. While this holds true for most bull runs, the market is now, in particular, flooded with passively managed funds tracking niche indices with narrow investment mandates (see the chart 'Number of equity funds launched in 2021). It is noteworthy that despite the hype, such funds are yet to taste success in a meaningful way, as measured by their NFO collections (see the graph 'Amount raised in NFOs in 2021'). But the sheer number of fund launches (with many more in the pipeline) makes one wonder about the rationale behind this big rush, as well as whether they are as investment-worthy as fund companies want investors to believe. Here we provide you with the answers that no asset manager will tell you. What's fueling this mad rush? What's the rationale behind the launch of passive and thematic funds? Well, you can get all sorts of reasons right from diversification to choice to simplicity but there's more than meets the eye. Here's how the honest confession of an AMC's product head would likely be read. Simplicity or complexity? Arguments made in favour of passives are built on the premise of simplifying choice, as they save you from the hassle of choosing from actively managed funds, which anyway play musical chairs on performance charts year after year. On the other hand, the choice of a passive can be pretty mechanical, as you can simply go for the ones that are low on expenses and tracking error. While there is merit in this argument, bombarding investors with a large number of passive funds is not exactly our idea of simplifying choice. It runs contrary to the very idea of offering a simple investment solution, which is what a mutual fund is supposed to be. Investors opt for mutual funds to delegate the decision of picking the right themes and strategies to the fund manager - be it consumption or electric vehicles or ESG or whatever else. Therefore, their interests are best served by unconstrained funds that can traverse through different themes based on the ju
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