How is the Closing Auction Session (CAS) impacting ETFs and index funds?
With the closing auction session (CAS) now live, India has effectively aligned with most of the key global markets. But we need to remember that CAS is not a small change. It is a structural shift, and such changes often take time to settle. The initial weeks have seen some volatility, and liquidity during the CAS window is still taking time to build. I feel confident that participation will gradually increase, and this will be very beneficial not just for ETFs and index funds, but also for various other market participants.
What’s driving the demand for index funds and ETFs in India?
With valuations still a concern, do you think passive investing is a better bet for investors?
Passive investing isn’t a market timing tool. It is a way to stay invested through cycles rather than second-guessing valuations. Asset allocation aligned to one’s goals matters far more than trying to predict the “right” entry point, and that discipline is where passive funds add real value.
In the current market scenario, should investors stick to ETFs and index funds compared to actively managed funds?
Apart from the large-cap index and commodities, which index funds are leading the passive industry’s growth?
Factor and smart beta strategies, such as those based on quality, momentum, value and low volatility, have grown rapidly, from roughly ₹5,000 crore to over ₹50,000 crore in just a few years. Equal-weight strategies and flexicap-oriented indices are also seeing rising investor interest as awareness of solution-oriented passive products gradually increases.
Can you shed some light on the importance of costs and tracking error when investors choose an ETF or index fund?
Cost is a key advantage of passive funds, but it shouldn’t be viewed in isolation, since the real test is how efficiently a fund tracks its benchmark. A fund with a marginally lower expense ratio but a higher tracking error or tracking difference may actually deliver a poorer investor experience. So I feel that both metrics need to be assessed together.
Do you see consolidation among passive fund providers as competition increases? What is DSP’s strategy to differentiate from competitors?
Like with any business, some consolidation is likely as scale becomes important, and players who don’t have a long-term focus may look for a route to exit. Differentiation, however, comes from tracking efficiency, execution quality and innovation rather than just size. Some of our work on innovative ideas that can help investors includes flexicap and equal weight strategies. We were also one of the early movers in setting up a dedicated investment team in line with global best practices, which enhances focus and gives investors greater comfort.
Where do you see the biggest growth opportunity for DSP in passive investing over the next 3-5 years?
India’s passive funds are around 17-18 per cent of the total mutual fund industry. In the US, this is above 50 per cent, which means passive funds are now larger than active funds. I don’t expect to see that in India anytime soon, but I surely feel that passive funds could account for around 30 per cent of industry assets in the next five years. For us, and for other serious long-term players, the key opportunity lies in deepening this shift through investor education, innovative indices, and strengthening our presence across retail, institutional and wealth channels.
Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers’ discretion is advised.
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