For those pondering over the shift to passive investing, there is a fundamental difference between an ETF and an Index fund.
An Index fund is still a mutual fund
An ETF is something which only a person having an active demat account can participate in
Number of investor folios with Mutual Funds in India is > 9 Cr
Number of demat accounts in India is approx 4 Cr of which only 25-30% are active
The shift to passive investing (if and when it materializes) is more likely to happen through the index fund route rather than the ETF route. An Index fund still charges 0.3% per year expense ratio and is highly profitable since the expenses involved are minimal, though this will bring down the average yield to AUM for leading AMC’s. An index fund still charges higher expense ratio than liquid and ultra short term funds.
The risk of HDFC AMC getting affected a lot due to the shift to passive investing is thus minimal. Relative performance ceases to be a consideration when one goes the passive investing route, if anything HDFC AMC should be able to mop up more AUM compared to other AMC’s if they wish to under the passive investing theme through index funds.
As a rule, differentiated products in asset management can charge a higher expense ratio due to the novelty factor (until investors realize they are falling for a narrative that does not necessarily deliver higher return). The current novelty factor in Indian MF is the interest in global markets through the fund of funds route where the expense ratio is higher, under the AIF route the novelty is long short funds. The ICICI Pru US Bluechip equity fund charges an expense ratio of 2.59% per annum, one of the highest expense ratio ICICI Pru AMC charges across equity funds.
While the shift to passive investing will eventually happen, there are some levers at hand for good AMC’s to keep control over their pricing power intact. Direct plans are more profitable to regular plans even if the expense ratio is lower.
The trick is to go deeper into understanding how the management can tweak these variables to keep the growth story intact. Thinking as an investor who just looks at financials is unlikely to reveal too many insights.
*Disclosure: Invested for self and customers, transactions in the past 30 days. *