Rise of passive trends with UTI AMC's Sharwan Goyal

at The UPS Store we want to make this summer The Summer of shipping summer ship AOA so you can start Crossing items off your must ship list like the Vintage Film camera your college kid needs for class or the V you told your mom you would send her ages ago and with our pack and ship guarantee your items arrive safe or we reimburse you so stop by your local store today for everything you need to be unstoppable visit the ups store.com garantee for full details available at participating locations most locations are independently owned product Services pricing and hours of operation may vary C Center for details The UPS Store be unstoppable you're listening to a mint podcast brought to you by HD smartcast hey everyone welcome to another episode of why not me money so today we have our guest as Mr Shan goyel he heads passive Arbitrage and Quant strategies at uemc he is a CFA Charter holder with over 16 years of experience in Risk Management equity research and portfolio analysis today he's here to share his words of wisdom on passive investing welcome to why not mint money a personal finance podcast where we help you understand basic money Concepts and share strategies for you to build your wealth so let's get started with your money Journey thank you for joining us to thank you so my first question to you is uh Shan passive funds are gaining a lot of traction in developed uh you know markets and a large part of incremental flows is also going to Passa funds uh so do you see similar Trends emerging in India so we have seen phenomenal growth of passive funds in India in last 10 years so size of passive funds have grown from just about 10,000 CR to almost 9 lakh CR in last 10 years so almost 90 times growth in last 10 years at the same time as a percentage of mutual fund industri a it has increased from just about 1% to almost 177% now so we have seen lot of growth in passive funds in last few years so initial phase of growth was primarily driven by uh retirement funds such as epfo because uh epfo and other retirement f for mandated to invest initially 5% of annual loation in ETFs which was subsequently increased to 15% of annual loation M but at the same time uh incremental growth is seen uh across various vertical such as RIS Distributors family offices advocating these simple yet effective investment solution to their clients I see um we believe that going forward the growth could be much more broad-based mainly because uh retail investors by new AG investors are aware about the benefits of these lowcost investment Solutions because of improved internet penetration investors are becoming aware about these passive Solutions and that we could see much more broad-based Rally or growth in going forward that's an interesting Insight Shan uh so my second question to you is uh within passive funds uh how should investors choose between ETF and index funds so objective of both ETF and Index Fund is to replicate The Benchmark and with an aim to generate returns which are very close to the underlying Benchmark so passive funds are also called beta tracker because these kind of funds help you generate Market DS okay yeah right uh so we believe that uh the mode of investment is based on the convenience and overall cost of ownership okay right so investment in ETF is very similar to investment in stocks because investors who wants to invest in ETF they can invest through exchanges right right while investment in Index Fund is very similar to investment in mutual F you invest and get the and N so investors should choose between EDF andest fund based on overall cost of ownership and convenience of Investments so in investors who are aware about the Nuance of investing in stocks and convenient to invest in stocks uh they could choose to invest in ETFs while investors who believe that from longer term perspective it is very not very important to capture intraday price movement you can choose to invest in Index Fund right so you are saying the overall cost of ownership is on the highest side with ETFs is what you have to say so we believe that uh overall cost of ownership includes uh apart from expense ratio it also includes brokerage deit charges and impact cost of edfs right yeah while these cost are bundled up in in case of index fund platform right Bund best total expense any investor who he's having account with say discount brokers who is paying lower broker they can choose to invest in edfs right while so I'm saying rather than just focusing on expense ratio charged by AMC you should also be considering that overall cost of investment in ATS right uh so my third question to you Shan is uh one of the biggest concerns of uh investors in ETFs is liquidity how can the industry overcome this uh issue what do you have to say about this so uh we believe that uh higher execution cost is a perceived risk or liquidity is a perceive Lisk in case of ETF okay market so AMCs are mandated to appoint market makers or authorized participants okay who are providing liquidity on exchanges so for examp if you are an investor wants to buy EDF units then Market maker will provide that units to you right and in turn Market maker will come to AMCs to create those units liquidity or liquidity for the for thems so we believe that it's a perceived risk although we believe that as in when the development of passive funds improved drastically and there are lot of retail participation then liquidity will further improve so it's honest lies on the all the market participants right to improve the liquidity so if Distributors and RIS are advocating these solutions to their investors in that case liquidity will further improve going forward but at the same time Market regulator CB has come out with efficient market making a mechanism wherein because of better settlement process the capital requirement for Market maker will further reduce in the ET years so we believe that the efforts are made in the right direction to improve liquidity for these ETFs going forward right just I'm curious about uh who who does the AMC appoints as market makers so uh market makers are nothing but uh Brokers brokers who are also dealing in these Securities right right so it's more of a perceived problem perceived problem although during extreme Market environment for example during election day happened the there could be slightly higher uh liquidity issue mainly because these Market bers find it difficult to provide liquidity in such volti Market environment so the spreads could increase during extreme Market environment but we don't see that kind of scenario uh playing out on regular basis so my next question to you uh is uh what are some exciting emerging opportunities that you see within passive Investments going forward so we believe that uh investors should start with simple to understand market cap oriented funds such as D and TX because um wider audience is aware about these indices because uh we know these indices for 20 30 30 year period right but apart from these broad market cap based indices index index funds are available in different platforms such as thematic uh funds such as consumption manufacturing that's right ETFs are Index Fund at the same time index funds are also based on uh sectors such as it ETF Bank ETF Healthcare ETF but apart from these market cap and thematic and sector based ETF new set of uh Avenues have opened up in last few years so these are called smart beta factor-based indices okay right so people have analyzed performance of these Factor based indices globally from longer term perspective for example there are four broad types of factor-based indices such as momentum low quality and value right so these are rule based smart vaa fund wherein portfolio is created based on certain rules right for example let's say quality is a very important parameter within midcap space so we have a midcap oriented Quality Index Fund which is called UTM Nifty 150 midcap quality 50 Index Fund wherein 50 High companies are selected from broad midcap Universe based on certain quality parameters such as Roe load oh that's interesting financial leverage and consistency of profit grow So based on these parameters these smart beta funds can be created for example we have close to two decades of data in Indian markets and these smart beta funds have performed far better as compared to plain vanilla market cap based in this one apart from broad market cap based EDF Index Fund investors can also use the smart beta fund to generate additional returns for the portfolio that's an interesting Insight again uh so my last question to you what are you doing to popularize uh you know passive funds the concept of passive funds among the investors and Distributors yeah so I would say passive funds are pull products mainly because they are providing investors simple be effective investment solution at a relatively lower cost as compared to funds right but at the same time we believe that uh the entire investment Community including Distributors should make an effort to combine both active and passive in any investor portfolio yeah because to achieve longer term objective of investors it is very important that you combine benefits of both active and passive yeah so we believe that these two are complimentary investment Styles so there should not be competition between active and passive so if entire distribution Community make an effort to combine benefits of both active and passive in an investors portfolio then in that case it will go a long way in achieving invest as long-term investment objective uh as a beginner how much should one have passive investments in the portfolio see it depends upon uh the aggressiveness and investment objective of any investor mhm we believe that a set location plays Far bigger role in any investors portfolio Okay which is actually overlooked in most of the cases um people are trying to find best stocks and best mutual fund schemes which is easiest at that done because persistency of active performance is pretty low in the sense if you realize longer term data then funds which have done well in recent past do well going for going forward to make money in any investment product you have to anticipate which funds will do well going forward that's right yeah so we believe that from core part of the portfolio should be created in combination of both broad market cap based Index Fund as well as Diversified active funds and then satellite portfolio could be created based on these thematic and smart vaa funds could you just uh tell us what are some misconception about passive funds that people think so the biggest misconception according to me is uh people say that passive funds don't generate Alpa so we need to understand that aim or objective of passive fund is not to generate Alpa right objective of passive funds is to replicate The Benchmark and thereby generating returns which are very close to overall market returns with us with a much lower cost as compared to active funds so active funds are exposed to certain systemic Market risk right and uh they could be very high variation in active funds performance as compared to Broad Market back based in this yeah while performance of passive F would be very similar to under magma so objective of both active and passive is very different so one should combine both to get desired outcome from longer term perspective at the same time uh we talked about these smart beta Factor based strategies right and which have performed exceedingly well from longer term perspective so investors could combine combination of broad market cap based IND this Index Fund as well as these smart beta funds toate slightly better returns as compared to L market right so what is your Market out or how do you see markets going forward so in last couple of years we have seen that markets are performing extremely well right so broad market cap based index one as as Nifty has delivered close to 20 or% return in last couple of years at the same time um the broader market cap based index such as midcap and small caps have generated far High return as compared to large cap yeah yeah right but investors should be aware that market has tendency to revert back to me valuation some of the pockets such as better small caps which are trading at 60 to 70% premium as compared to their own long-term averages in terms of uh various valuation parameters such as and price to B ratio have tendency to revert back to mean valuation so one should not get too excited about recent performance of these pockets and one should keep rebalancing the portfolio based on long-term investment long-term Investments so these are some of the things which investors should keep in mind investors should always build the portfolio based on relative over rather than what has worked in the past because uh these Pockets keep reverting keep rting okay thank you sir thank you thank you so that brings us to the end of this episode if you want to know more on this topic you can reach out to me on my Twitter which is at post Anil or on LinkedIn using my full name Anil post we will be happy taking your suggestions thank you for tuning in see you in the next episode to stay updated on this podcast follow us at HD smartcast on all the major social media platforms to listen to more such podcasts log on to www.dmc.com [Music] at The UPS Store we want to make this summer The Summer of shipping summer ship AOA so you can start Crossing items off your must ship list like the Vintage Film camera your college kid needs for class or the V you told your mom you would send her ages ago and with our pack and ship guarantee your items are arrive safe or we reimburse you so stop by your local store today for everything you need to be unstoppable visit the ups store.com garantee for full details available at participating locations most locations are independently owned product Services pricing and hours of operation may vary C Center for details The UPS Store be unstoppable