JanDhan 2.0: Passive funds can help enhance financial savings

The massive rollout of JanDhan bank accounts has surely gone a long way towards financial inclusion in India. The total balance in the 410 million JanDhan bank accounts is a large sum of Rs 1.31 lakh crore. With financial inclusion of this magnitude, we need to now focus on improving savings in the country and making available convenient, unspeculative, and low-cost savings avenues that can boost wealth creation.

At present, as a country we have Rs 143 lakh crore of deposits with banks, Rs 27 lakh crore investment in mutual funds. This is apart from the investments in physical gold and real estate.

Like in other sectors, technology is making its impact in fund management as well, and this can provide a fillip to financial savings. Passive fund management (PFM) and exchange-traded funds (ETFs) can be important enablers and can provide market-linked returns with transparency and at low cost.

These alternatives take away the risk of human judgement and decision making. It’s like a driverless car that drives based on technology-driven pre-programed inputs.

These funds are managed passively, and therefore, the annual expenses are significantly lower than the actively-managed funds. They provide liquidity – like stocks – they are sold at real time prices and trade throughout the day. Being listed on stock exchanges, their cost of distribution is much cheaper, and the reach is wider. Also, they do not have any minimum investment requirement, so investors can invest as per their requirement.

As a result, globally, passive fund management is growing twice as fast as active fund management. It is expected that by 2024, out of a total of approximately $ 106 trillion under management globally, almost $ 25 trillion will be managed by passive funds. I believe this trend of investor movement towards passive funds will continue.

Blackrock, the largest fund management house in the world, at the end of 2019 was managing ~$ 7.4 trillion, out of which almost $ 4.9 trillion was being managed by way of ETFs and passive funds. Active fund management constituted only ~$ 2 trillion. Passive funds formed 65-70% of the total AUM of fund managers like Blackrock and Vanguard.

Back home, passive investing is seeing some traction. Post the launch of the first such fund in 2001, the passive format has grown over time and there are close to 200 passive management schemes in India with an AUM of Rs 2 trillion as of today. This forms around 7% of the total mutual fund industry.

ETFs offer a variety of investment options such as diversified passive equity ETFs, niche passive equity ETFs, debt ETFs, gold ETFs and active ETFs. Additionally, as mentioned earlier, the cost of fund management is almost negligible. A fund management team (driver) is not required – once the technology is set up, it can move on auto-pilot with a small back office team. The distribution cost is also significantly lower, as these are standard products that can be sold online and do not require personalised selling/ marketing. As all the costs are debited to the unit holders, any savings will further improve return to investors.

The combination of a simple product, high liquidity through exchange trading, transparency, ease of trading and lower costs make passive funds a very attractive option. Today, 84% of mutual fund investment is contributed by top 30 cities. Passive investing/ ETF, if distributed technologically, would make a very popular product for masses across the country. It can change the savings landscape in India and can create liquidity in assets class like government bonds, corporate bonds, commodity like gold etc.

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