Only passive index funds can take equity investing to the masses: Zerodha Fund House’s Vishal Jain (2024)

Zerodha Fund House (ZFH), the asset management company started by the country’s second-largest stockbroker, is looking to take mutual fund investment to the next level by providing passive index funds to potential investors, says its CEO Vishal Jain.

While there are around 13-14 crore mutual fund accounts in the country, only a third are active and unique. According to Jain, this is because equity investing is still a complex product for most people. Passive index funds’ simplicity can attract new investors to the market, he adds. These funds are investment vehicles that look at the market index and reduce their expense ratio by minimising buying and selling and sharing more profits with investors.

“How do you get more and more people to start investing? To me, there is no better product than passive products, which will help more people to start investing in Indian markets, into mutual funds and get better outcomes,” says Jain.

Zerodha AMC got its mutual fund licence last August and has launched a Nifty Large Midcap 250 index fund, ELSS Tax Saver Nifty Large Midcap 250 index fund and Nifty 1D Rate Liquid ETF. The company promises transparency and these are direct funds, which means they are not sold through third-party agents.

“These products made a lot of sense because you had a huge population you have still not covered. And therefore, when you look back and think, what are those products that you can take to investors, especially people who are not financial literates, you have got to talk about simple products,” says Jain, adding that his vision aligned with what Zerodha AMC wanted to do.

Jain has been a veteran in the passive investment space with his Benchmark Mutual Fund and launched the first equity traded fund (ETF) way back in 2001. The venture was acquired by global investment banking giant Goldman Sachs in 2011. Before that, he worked with Crisil to start India Index Services And Products, an independent index company set up as a joint venture with NSE, in 1997.

According to Jain, it is impossible for a regular customer to research well and keep picking the right stocks or mutual funds to get the best returns all the time. He feels that the collective wisdom of the market is greater than the abilities of a single fund or a fund manager in the long run—over a decade or more. Over the long term, the returns between successful active funds and passive funds are minuscule, says Jain, adding that a lot of investors are recognising this, especially since passive funds do not have high running costs and pass on benefits to investors.

More contenders

The mutual fund business has recently seen a lot of interest, with Bajaj Finserv, Navi Mutual Fund, Groww Mutual Fund and Jio Financial Services getting an AMC licence from regulator SEBI. With digital platforms Zerodha, Groww, Paytm and PhonePe are adding more mutual fund accounts than traditional players, the expectation is that the space will see millions of new investors enter equity investing.

Zerodha has close to one crore customers and around 65 lakh of those are active according to NSE data. However, Zerodha Fund House is not just restricting itself to existing clientele or customers who already have an exposure to equity. Jain says that after direct investing, a lot of customers feel that they cannot keep doing it day in and day out. “And therefore, maybe I should look at, you know, products through which I can take a diversified exposure to the market through a simple passive product,” he adds.

“There’s nobody in the world who has constantly got it right. And it is not as if people are not intelligent or that people can’t do it. It is just that the market is a far larger place than an individual,” says Jain.

Transparent disclosures

ZFH is also trying to bring transparency in terms of how it invests or the claimed returns. Jain points out that since SEBI introduced benchmarking of mutual fund returns against the index, and scheme categorisation over the last five years, transparency has come in. Customers now have a better idea about whether a large-cap fund is indeed investing mostly in large caps and so on. According to Jain, a lot of mutual funds earlier also showed returns without benchmarking against the index, and these changes increased the attractiveness of passive funds vis-a-vis active funds.

The company feels that customers will have a basket of investment products from direct investing to mutual funds, gold, fixed-income products and real estate, among others. Jain feels that investors should not stress about getting it right as India’s growth story will itself play out with handsome returns as long as people stay invested for a long time.

“When we approach investors, what we are looking at is simplicity. You go and tell the person, ‘Look, you know, here are the top 250 companies in India. And if you want to sit on the India growth story, it’s a fantastic product for you to be in’,” says Jain, explaining ZFH’s approach to reaching out to the next set of equity investors. He adds that most investors would not understand PE (price to earnings) multiples and they don’t need to understand that to achieve their financial goals either.