Last week I read the news that passive funds have overtaken active funds in terms of money invested.

Passive funds are the funds which don’t need a lot of management, things like Index Funds (like NIFTY 50 in India, or S&P 500 in US), and Exchange Traded Funds (like Bitcoin ETF).

These generally perform similarly to market, and don’t require much overhead for the fund to run, so the fees of these kind of funds is super low.

In contrast, active funds are funds which are actively managed by a fund manager, and need higher overhead, but they try to beat the market on your behalf.

Because these are actively managed, and need big teams, they have higher management fees compared to passive funds.

Active funds have historically been the funds with maximum capital, until last month!

graph of active assets vs passive assets in US

The above data is for US (and in fact the whole article is in US context).

As per me, there a few reasons why the graphs have flipped and passive funds have become the most dominant asset.

Low fees

First is obvious. The difference in fees between passive and active funds is huge. The fees is also paid out yearly, and you can see how they start to eat into your profits.

2% fees might not look much from outside, but in 5 years, you’ve paid 10% of your capital as fees.

The passive fund fees are much smaller (0.06% for Navi Nifty 50 last I checked).

Investor Education

There has been a lot of interest in delivering and consuming financial and investor education content.

These have been coming with the rise of Youtube, Tiktok, and instagram reels. This education tries to cater to lowest common denominator to get maximum views. So they end up giving the most generic information, which is to buy the market index.

Buying market index also happens to be very low on fees, which helps investors with their returns.

On top of that, statistics like 70% fund managers don’t beat the market! The public laps up this information, and I strongly believe this has been the reason for rise in passive funds, from retail perspective.

Incentives

Earlier, most of the funds were bought from a broker, or advisor.

These advisors were paid a commission for selling the fund.

This created incentives for brokers to push funds that gave them highest commission, but that would also mean that these funds charge a lot in management fees to payout these commissions. These also lead to lacklustre performance for the investor in the market.

Now that you directly buy your Mutual Funds from an app, and are educated by unpaid content creators, there are no incentives to push any specific fund.

So again, creators end up pushing the most risk free sensible thing – buy the market i.e. and index that tracks it!

Conclusion

These are just some fleeting thoughts I had which lead to this post. If you think I am wrong, tag me on twitter and let me know how I fucked up.