Why passive funds are hiring more to mimic benchmark indices better

Subscribe to enjoy similar stories. As passive funds slowly yet surely get more traction in India, their asset mangers are expanding teams, typically very small, to run operations more efficiently and reduce gaps between their performance versus a market index. The bigger teams, small even after expansion compared to active funds, are helping passive fund managements create separate verticals, launch more products, and mirror better the indices they want to track.

This relative performance is measured by a metric called tracking error, which in statistical terms is the percentage difference of standard deviation between the fund and the index—essentially checking how closely a fund's performance mimics that of an index. An increase in team sizes has led to reduced tracking errors for such passive funds. Passive fund management is not fully automated and requires human intervention for rebalancing, deployments and execution.

As product count rises and pressure on a single person increases, the risk of operational and tracking errors rises. The passive side of an AMC is relatively smaller than its active side. On average, there is a five-member team on core operations for passives versus a 20-member team on the active side.

The hiring in passive teams is more pronounced at larger fund houses; the hirings have been in core operations and sales to scale business, managers said. ICICI Prudential Mutual Fund, with assets worth ₹11.3 trillion as of December end, has strengthened its passive investing platform by expanding its passive dealing desk, enhancing its on-ground sales presence to support exchange-traded funds (ETFs) and index funds across its distribution network, and building focused product capabilities. The results