Active vs. Passive Funds: Insights into Mutual Fund Flows in Q2

November 15, 2023

During the July-September quarter (Q2), active equity funds took the spotlight, attracting significant attention from mutual fund investors. According to a study conducted by Motilal Oswal AMC, active equity funds experienced robust net inflows of approximately Rs 74,000 crore. Fund managers demonstrated their ability to generate higher returns for investors through dynamic and active investment strategies, making active funds the preferred choice among investors.

Understanding Active Funds

Active funds are managed by professional fund managers who actively make decisions on whether to buy, hold, or sell the underlying securities in the portfolio. These funds rely on active stock selection and adopt various strategies and styles to manage investments. The primary objective of active funds is to outperform the benchmark index and generate superior returns (alpha) for investors. The risk and return associated with active funds depend on the specific investment strategy employed, as outlined by the Association of Mutual Funds in India (AMFI).

Q2 Flows in Active Equity Funds

In Q2 of FY’24, the mutual fund industry witnessed net inflows totaling approximately Rs 51,000 crore. Active equity funds led the way with net inflows of around Rs 74,000 crore, reflecting strong investor interest. Notably, investors displayed a keen appetite for active small-cap funds, accounting for about one-third of the Rs 33,000 crore net inflows during the quarter.

Within the broader category of equity funds, active small-cap funds attracted a significant share of net inflows, representing approximately one-fourth of the total. However, focused and ELSS (equity-linked savings scheme) categories within active equity funds experienced net outflows, totaling approximately Rs 2,000 crore.

The study also highlighted the growing popularity of active multi-cap funds, with two NFOs (new fund offerings) gathering Rs 2,000 crore out of the approximately Rs 8,000 crore net inflows in Q2 FY’24. In contrast, active large-cap funds saw net outflows amounting to Rs 1,800 crore.

Passive Funds: A Different Approach

Passive funds, including index funds and exchange-traded funds (ETFs), follow a strategy that replicates a specified index or benchmark. In passive funds, the fund manager has a passive role in stock selection, with buy, hold, or sell decisions driven by the benchmark index. The aim is to closely mimic the index with minimal tracking error.

Inflows into Passive Equity Funds

During the July-September quarter, passive equity funds received net inflows of Rs 9,000 crore. Among passive funds, equity claimed the majority share, accounting for approximately 78% of net inflows, while commodities secured an 18% share. Investors demonstrated a preference for passive large-cap funds, with this category receiving around 90% of all net inflows. Other passive categories, such as mid and small caps, also attracted significant net inflows, considering their relatively smaller assets under management (AUM).

Tailoring Investments to Your Goals

Investors have the choice between active and passive funds, each catering to different investment objectives. Active funds are suitable for those seeking to leverage the expertise of fund managers in generating alpha. Fund managers actively analyze market forces and economic conditions to aim for better returns. Passive funds, on the other hand, are ideal for investors who wish to align their investments precisely with market indexes.

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