In India, the share of passive funds in the overall mutual funds AUM is just about 15-17% as of date. This ratio has largely stagnated in the last couple of years. In comparison, the equivalent ratio of the passive funds in developed markets is closer to 60%. Of course, there are the passive giants like Vanguard, who have been driving passive investing for close to four decades in these countries. While India did make rapid strides, it will take a big effort for passive funds to build their market share from current levels. Here are 3 selling propositions to focus on. 

In his 2016 letter to shareholders, no less a person than Warren Buffett admitted that Jack Bogle of Vanguard had saved billions of dollars for US investors with his simple invention of index investing. The logic was to just peg the portfolio of a fund to an underlying index that is well-diversified. This reduces the need to closely monitor the fund and take churn decisions on a regular basis. This reduced cost is passed on to the investors in the form of lower total expense ratio (TER), which eventually enhances the returns on such passive funds in the long run! 

One of the key challenge that an investor faces is not the fund manager’s struggle to beat the index. It is not knowing if the outperformance is actually an outcome of skill. In a robust market that is simple to understand and interpret, all the fund managers generate returns. However, most of the returns are coming from the market and not from the skills of the fund manager. Why pay 2.5% TER for active funds, when you can get similar outcome from an index ETF with less than 0.8% TER? Secondly, the obsession with alpha forces fund managers to take on more risk; and investors may believe that the fund manager is beating the index, when in reality they are just trading the risk. That is where passives score better! 

Perhaps, one of the biggest merits of passive investing is in simplifying the full process of diversification. If you want to underplay or overplay certain sectors, the easiest thing to do is to buy or sell an underlying index that reflects that theme. It is less expensive and more elegant than trying to use active diversification of your portfolio. More than spreading the risk, use of passive funds also allows the investor to gradually shift the dominance of their portfolio from equity to debt and vice versa. This is one of the underrated and, perhaps, most critical reasons to opt for passive funds. It is time to get the narrative for passive funds correct!