Indexing’s Evolution In Indian Markets

By Koel Ghosh

Indexing, also known as index-based or passive investing, has been slowly but steadily growing and transforming asset management and financial markets in India. For more than a decade, there has been a strong preference for actively managed funds among Indian investors, and understandably so as historically these were the only financial products that dominated the market for a long time.

However, in recent times, investors’ appetites have been shifting to index-based strategies with the increasing availability of independent, transparent, and rules-based global, regional and local indices, along with market benchmarks in the country and, more broadly, the Asia-Pacific region.

Indeed, based on AMFI data, there has been a significant shift in the last few years, and investor interest in index-based or passive strategies is reflected in the growth of assets under management in index-based products such as exchange-traded funds. For example, 294 index-based products with aggregate assets of INR 6.46 lakh crore account for 16% of the total industry as of November 2022. If we compare this to the number from two years ago in 2020, the passive market accounted for only 9% of the total asset management industry, with 136 products and assets totaling INR 2.6 lakh crore.

The number of index-based products has doubled, and assets have increased over 2.5 times. The five-year growth story in assets and products has been exponential; while allocations to passive strategies previously made up a mere 3% of the total asset management industry in 2017—with 67 products and assets totaling INR 0.75 lakh crore—the assets in the market today reveal it has expanded 8 times.¹

The benefits of indexing, including transparency, lower costs, and efficiency, have helped fuel the steady growth of indexing in the Indian market. The growth trends are the same in key markets globally, especially in the U.S., where the adoption of indexing is more advanced. In fact, according to S&P Dow Jones Indices’ own estimates based on data derived from our core U.S. equities indices—the S&P 500^®, S&P MidCap 400^® and the S&P SmallCap 600^®—indexing has saved investors more than USD 403 billion in active management fees over the past 26 years.

The performance of index-based funds versus actively managed funds is another key growth driver. For two decades now, S&P DJI has been tracking and comparing the performance of actively managed funds versus their respective benchmarks via its biannual S&P Indices Versus Active (SPIVA^®) Scorecard, which has been the de facto scorekeeper of the ongoing active versus passive debate since its first publication in 2002. S&P DJI currently tracks performance data and publishes these scorecards in select markets in the Americas, Europe, Middle East and Africa and APAC, including India.

While the results are not always the same, SPIVA Scorecards in the key markets S&P DJI follows displayed a common trend of actively managed funds trailing their benchmarks by 50% in the one-, three- and five-year categories in most countries (see Exhibit 1). As per the mid-year 2022 scorecards, this trend was particularly prevalent in the U.S., Mexico, Chile, Brazil, MENA, Europe, Japan, and India. The only exception among the mid-year 2022 reports were Canada, South Africa, and Australia.

More specifically, the SPIVA India Scorecard has provided a semiannual update on the active versus indexing debate in India since 2013. The India scorecard compares the performance of actively managed Indian mutual funds with S&P DJI benchmarks in their respective categories. In the long term, the majority of the active funds have not been able to outperform the benchmark since 2016, as shown by the 10-year data. The three- and five-year categories also displayed the most instances of over 50% underperformance of active funds since 2016. In particular, the year-end 2018 and mid-year 2022 scorecards showed the remarkable outperformance of the S&P BSE 100 compared with active funds of over 80% in the same categories.

The landscape for indexing is shifting rapidly. Not only are assets growing, but the variety of indexing choices is also growing—moving from core equities to market beta products, to sectors and factor-based indices. Factor indices such as low volatility, quality, momentum, and value are picking up wide interest as well. In addition, diversification and exposures to international indices are also making their way into passive or index-based strategies in India. As the understanding and knowledge of the benefits of index-based investing grows, there is further potential for expansion in India and globally.

¹ Source: AMFI

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