Index funds have begun showing up on investor radars lately. Data from the Association of Mutual Funds in India (AMFI) showed index funds have recorded inflow of ₹4,914 crore in January – the highest since AMFI started giving granular data about flows in and out of each fund category.
The inflows in previous months in index funds have been one of the highest among active and passive equity funds. A large part of the index flows in January 2022 was driven by New Fund Offers (NFOs), which contributed nearly half of total inflows. In January 2022, NFOs such as Axis Nifty Next 50 Index Fund, Navi Nifty Next 50 Index Fund and UTI Sensex Index Fund were launched.
In the past five months, flows into index funds have been rising continuously. As a result of this, the six-month average inflow in index funds rose to ₹3,582 crore compared with previous one-year average ₹721 crore.
The total assets under management (AUM) of index funds rose by 225% on year-on-year comparison to ₹49,905 crore in January 2022, while the total equity fund AUM rose 50% year on year to ₹13.37 lakh crore.
Large-cap funds, which are seen as close peers of index funds in active fund investing, saw AUM expansion of 34% in the last one year.
Besides inflows, a fact which gives almost an accurate description of increasing preference for index funds among investors is the increasing folios related to index funds. The share of index fund folio rose to 18% in January compared with 8% a year ago. The folios of index funds rose to 22.16 lakh in January 2022.
There are a few fundamental reasons as to why index funds are gaining high acceptance among investors. First, they carry a low expense ratio compared with large cap funds. Second, an investor gets exposure to passive fund style without opening a demat account. Due to these two factors, new investors have been investing in index funds. In the last one year, the number of index funds launched rose to 68 in January 2022 compared with 37 a year ago. Also, in terms of returns, index funds have delivered a reasonably good performance. The top five index funds by AUM delivered returns of 14.55% in the past one year.
Index funds are passive funds which replicate the composition of an underlying index. This means these funds buy all securities of an underlying index with the same weightage.
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