Underperformance of active funds paved way for passive funds: Kalpen Parekh, DSP Mutual Fund

From a humble beginning in 1963 with Unit Trust of India (UTI) to 2021, the Indian Mutual Funds (MF) industry has come a long way in today. Today, the industry boasts of a plethora of index funds, a booming ETF market and a gradual inclination toward international funds as well. The evolution has been slow but definite.

“Most of these changes are an outcome of the recency bias. Its a part of human behaviour to invest in things that boast of a good report card in the recent past. This is why international funds have gained prominence in India. Active funds have underperformed thus paving the way for passive funds,” Kalpen Parekh, president of DSP Mutual Fund told Money9.

There is a lot of buzz around terms like active vs passive funds, domestic vs international funds, mutual funds vs ETF or direct investments vs mutual funds. However, Parekh suggests, ultimately all of these are pipelines to feed into ‘corporate profitability’ and fulfill our future financial goals.

The growth of mutual funds can also be credited to the wave of digitalisation in India. It gave a smartphone to almost 30-40 crore people, each of which acts like a branch for mutual funds and wealth advisors now.

“Digital India has given MF industry the opportunity to present their services to a large population. The traditional way of walking up to a branch office to open a portfolio has almost ceased to exist. This, to me, is a great step in the evolution and penetration of MFs within the country. It has converted the conventional Indian saver into an investor,” Parekh asserted.

Systematic Investment Plan, or SIPs, have also become very popular today. Time horizon for investing in SIPs have increased significantly from 2-3 years in the past to 10 years at present. This, in return, allows the investor to cover a full market cycle.

“When you invest in a 10-year SIP, one witnesses all three shades of the market – cheap, fairly valued and bull market. This is again a huge sign of evolution and would help investors earn better returns,” Parekh pointed.