Zerodha’s new passive mutual fund offerings have sparked an online debate between advocates for passive and active funds.

What Happened: Nithin Kamath, the founder and CEO of Zerodha, announced the launch of two new funds under ZerodhaAMC. The company aims to promote the concept of passive funds in India with these offerings.

Kamath said the newly launched funds are an open-ended index fund and an equity-linked savings scheme (ELSS) or tax saver fund tracking the Nifty LargeMidcap 250 Index. The company’s focus on passive funds aims to avoid conflicts that may arise from promoting high-income-generating active funds.

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He further explained that every asset management company (AMC) can only have one ELSS tax saver fund, either active or passive. As most AMCs opt for active ELSS funds, Zerodha decided to introduce a passive ELSS.

“The data shows that over the long run, most active funds struggle to outperform their chosen benchmarks, and it will only continue to get harder,” Kamath said.

However, Kamath’s comments evoked some strong responses with some users saying that other asset managers handle active funds only to charge higher fees was incorrect.

However, others agreed with Kamath’s contention that active funds generally lagged the indexes they look to outperform.

Radhika Gupta, managing director and CEO of Edelweiss Mutual Fund also chimed in, saying that there was no need to have a debate on active versus passive funds, when one could invest in both.

“Customers and advisors have more to choose from, and choice is a good thing. I myself buy active small cap funds and BAFs, and a passive Large and Midcap index fund from @EdelweissMF,” Gupta said. “Let's not focus on dividing a tiny pie but expanding the beautiful opportunity that MF provides.”

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