Daybreak - Zerodha and Groww wanted to disrupt mutual funds. But they're stuck in first gear

Episode Date: April 8, 2025

 For a while now, the new kids on the block in India’s $750 billion mutual fund industry have been trying to really shake things up. The likes of Navi, Zerodha and Groww have been dreaming of a big disruption. And a couple years ago, they thought they had found the answer to their prayers. A playbook that would catapult their growth. They were convinced passive investing is the future. They had good reason to believe so. Last year, passive funds won the big game in the US, where—for the first time ever—they overtook active funds in assets under management (AUM). Blackrock and Vanguard built empires on this shift. So, naturally, the question is: why not in India?Well, things haven't worked out quite how they had hoped. Tune in. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. For a while now, the new kids on the block in India's $750 billion mutual fund industry have been trying to really shake things up.

I'm talking about the likes of Navi, Zirhoda, Grow. the non-banks and discount brokers that are relatively new to a game that has so far been dominated by legacy fund houses. You see, these newbies have been dreaming of a big disruption. And a couple years ago, they thought they had found the answer to their prayers. A playbook that would catapult their growth. So what Zeroda, Navi and Groh decided to do was they decided to sort of introduce passive funds. So around like some time around 2021 these new fund houses decided to introduce

like a slew of NFOs that were mostly like passive funds. That's my colleague Archishmaeyer. She's been tracking how these new players, Navi, Zerodha and Groh, have been betting big on passive funds. But the obvious first question is, what are they? Okay, so there are two types. One is an active fund and another is a passive fund. an active fund is essentially a scheme which will look to outperform the benchmark.

A passive fund is just a plain vanilla index fund that will look to just mirror the benchmark's returns. So typically passive funds are either index funds or exchange traded funds, ETFs, that don't rely on expensive fund managers. Instead, like our Chishma said, they just mirror the market. And these newbies can't get enough of them. In fact, in the last six months, they've always. all launched new fund offers.

And every single one of them has been a passive fund. So in February, a Navi mutual fund debuted with a variant of a small cap fund, which was called the Nifty Small Cap 250 momentum quality 100 index fund. Like it sounds like, it itself sounds too long, right? And around at the same time, Grow had also introduced two passive funds, one that was tracking the Nifty 200 and another that just buys the first one. And also last October, Zeroda Fund House had ruled out an open-ended scheme investing primarily in units of a gold ATF. Now, there's a good reason for them to think that this is the future.

Passive funds have had a proven track record in the US. In fact, last year, for the first time ever, they even managed to overtake active funds in assets under management or AUM. Firms like BlackRock and Vanguard were able to build empires entirely based on this shift. So naturally that got newbies here thinking, why not us? Well, unfortunately for them, things haven't been playing out quite as dramatically as they had hoped. So, in a way, you can say that it wanted to sort of replicate the success in the US. But if we are taking official stats, official data, it's not been, I mean, data sort of tells us like a very different story. Well, yes, passive AUM has surged.

In fact, it's more than tripled in four years. But as a share of the total mutual fund industry, well, it's been a sluggish climb from 9% in 2020 to just 16% in 2023. And the thing is, even when it comes to that 16% slice, these newbies aren't the ones that have been reaping the rewards. They account for merely 1%. So is the revolution they hoped for dead?

Well, let's find out. Welcome to Daybreak, a business podcast from the Kemp. I'm your host Rahil Filippos and I don't chase the news cycle. Instead, every day of the week, my colleagues Nikda Sharma and I will come to you with one business story that is worth understanding and worth your time. Today is Tuesday, the 8th of April. I think India, what it wanted to do was it wanted to create its own vanguard. Vanguard is by far the largest, you know, passive fund AMC in the US, right?

So in an attempt to like sort of get to that space, I think the new, wage players wanted to sort of, you know, sort of get into the market saying, hey, listen, this is what, this is the product that we are offering. And we believe this product is the future. Passive investing was supposed to be an inevitability in India. But the first shift happened back in 2017 when Sebi rewrote its rulebook. So at that point of time, what happened is that Seby had forced fund managers to like properly define what a large cap, midcap and a small cap stock could be. So that would limit that would limit

like how much their funds could drift between categories. For example, you know, managers who have been quietly padding up their large-capped stocks, large-cap funds with like mid-cap and small-cap stocks, they couldn't do it anymore. They had to stick to like a one particular lane. So

what was even worse that is that you know, the fund house could no longer launch more than one fund in an active category. Passive funds did not have that sort of a restriction. Because they were anyways following, they were anyways, you know, replicating the performance of the benchmark.

And due to that, many indices had sprung over the years. Even after that, everything pointed in the passive direction. Low fees, a bull market, and also several data points indicating active funds underperforming. Which explains why between 2020 and 2023, we saw passive funds' share of mutual fund assets climb quite steadily. But cut to 2025, and things aren't looking all that great. Unlike in the US, where passive fund AUM had grown steadily and even surpassed active fund AUM,

the same trend isn't quite playing out here in India. Last year, in fact, passive funds as a share of the total mutual fund industry actually shrunk. It seems like the grand march of passive investing in India is starting to roll backwards. And Atschisma says there are three reasons for it. So, one of the factors that sort of went against passive funds is like active funds is still dominant in India. Like mutual fund distributors still want to push active funds to their investors. Just for the one single factor that, you know, they just pay healthy commissions. Like, I remember this distributor giving like context to it.

So if we were to push a passive fund to an investor, he's probably going to gain like about only 10 or 20 pesos for every hundred rupees that's being invested. So in that sort of scenario, it doesn't make good business sense for the distributor himself, right? So what they would rather do is, is like, you know, they would push, they would want to push like an active fund to an investor and he would rather gain like a much bigger commission in that sense. At the end of the day, India's fund industry runs on commissions. Like a Chichmaa mentioned, even if passive funds are good for the customer, it has to make good business sense for the distributor. This is, after all, a system where distributors have a very strong say.

And one more thing is that, you know, active fund NFOs have garnered more than passive fund NFOs. So from, if you take from the timeline of, from 2020 to like March 2025, you know, active fund NFOs that have been introduced during that time, what was once like, you know, an initial AUM, AUM is assets under management, what was initially like an AEM of 3.1, has now grown to about 5.6-lac crore. Whereas for passive funds, what started out from 43,000 crore has now only grown to like 2.1 lakh crore

and it's like a fraction of what active funds have managed to, like, you know, what active funds have managed to garner at this point. The biggest NFOs in recent years have all been active funds. Not just that, they've all been led by legacy fund houses, the likes of SBI, HDFC, and. and ICICICII. In fact, quite impressively, SBI alone accounted for half of the top 10 highest grossing NFOs between 2020 and March 2025. Even if you look at the most successful passive NFO, which is Motilal, Oswal, Nifty, Inda, Defence Index Fund, it barely raised a fraction of

what an active fund would. You see, more passive launches fail to cross 200 crore rupees in AUM, and the numbers are even worse for newbies. Some of Navi's funds for instance, couldn't even hit 10 crore rupees. Architima says a big reason for that is because fund houses just don't know how to keep things simple, which was the whole point of index funds in the first place. Like, you know, people go to a passive fund because it just because of the fact that it will replicate the benchmarks performance. But when you're going to add, when you're going to add like other type of factors like momentum,

quality, value, all of these factors when you just put it then, the investor just gets like confused. What mutual fund scheme should I go to? You know, it's like, you know, left right and center when like, you know, when mutual fund houses, they start introducing schemes like this rather than giving like a plain vanilla index. The investor just gets confused. Like, you know, okay, how do I now, okay, which one should I actually go towards to?

Like, what is the criteria? The thing is, even the complicated stuff is selling, especially when it is launched by a legacy fund house. You see, they don't want to miss out if passive becomes big. So they've also just been throwing everything at the wall. But in their case, the chances of something actually sticking is considerably higher than with the newer entrance. Players like SBI, ICICI, HDFC, they've still continued to rule the roost.

For example, I can give you, there was this instance where SBI had launched a slew of passive NFOs in 2022 September. And all of them had garnered an initial AUM of at least like, you know, 900 crores. You can take that in comparison to what grows current AEM now. Gross current AEM is just about like, you know, some 1,700 crores. So you get the disparity, right? And one of the reasons why these legacy fund houses have been able to capture this is because one, they have like a robust distributor system. They also have brand name.

You would believe someone like an SBI over a relatively newer fund house, right? So that sort of brand name sort of helps in like, you know, people going towards these legacy fund houses. So breaking into this increasingly complicated passive market is hard for new players. But add to that, the fact that there is an even bigger player waiting in the wings, the real disruptor, Geo BlackRock. This is a subsidiary of Geo Financial Services formed in partnership with the US-based investment company BlackRock. It's still waiting on regulatory approvals, but once it does enter the picture, everything could change. Actually, I remember one of an executive who I was talking to.

Actually, he was a mutual fund distributor who I was talking to. He was saying when the Gio BlackRock AMC starts coming into play. What he said was he made, the Gio BlackRock AMC may not be able to sort of make that big of a dent in passive funds because there's already like so many variations going on in the passive fund space itself. But what it can do is like make a disruption in the active fund space. Say, for example, if they sort of introduce an expensive ratio of. you know, a lower expense ratio, for example, like 0.4 or 0.5%, which is much lower than the industry average, other legacy fund players will be forced to follow that suite, right?

And then in that sense, Geo BlackRock will become like the cost leader at least when when it launches. So what does that mean for the likes of Zirhodha or Navi or grow and their dream of a vanguard-style passive revolution? So it is going to be a slow game. Like, it's not easy, like, competing with, like, a large fund house, like, an SBI or in HDFC, right? Especially with the kind of AUMs that they all have at this sort of moment. It's going to be like a slow burn game.

So, there is no two ways about that. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippos, produced by me Snigda Sharma and edited by Rajiv Sien.