Whalesbook
India's Passive Investing Booms
India's investment scene has changed significantly. Passive funds have moved from a niche option to a core part of many portfolios. Assets Under Management (AUM) in passive funds have soared, reaching an estimated ₹14-15 lakh crore by the end of 2025. This is an extraordinary surge, an almost 18-fold increase from less than ₹1 lakh crore recorded in 2018. Passive funds now account for about 18% of India's total mutual fund AUM, which reached approximately ₹80-81 lakh crore by late 2025. This strong growth follows global trends, where passive strategies have increasingly replaced active management, especially in developed markets.
Diversifying Beyond Basic Indexes
The growth of passive investing in India isn't just about tracking big market indexes like the NIFTY 50 or BSE SENSEX. Investor interest has broadened significantly, expanding into a wider array of passive products. Demand has grown for strategies tracking specific sectors, strategies based on factors like momentum, quality, and low volatility, and thematic investments. Commodity ETFs, particularly for gold and silver, have also seen substantial inflows, further broadening passive investing beyond equities. This diversification shows a maturing investor base looking for targeted market exposure and tailored portfolio tools, moving beyond simple large-cap choices.
Active Managers Face Growing Pressure
The rise of passive funds directly challenges traditional active fund management. Active equity funds, especially large-cap ones, have consistently found it hard to beat their benchmarks after deducting fees. Data from 2025 shows that about 65-66% of active large-cap funds failed to beat their respective indexes. This ongoing underperformance, made worse by active funds' higher costs (expense ratios often 1% to 2.5% yearly) compared to passive funds (0.05% to 0.5%), puts active managers under significant pressure to prove their value. While active funds might still offer an edge in less efficient areas like mid-caps, small-caps, or specific themes, the cost advantage and steady market tracking of passive options are compelling for many investors.
Risks to Consider with Passive Funds
However, passive strategies have built-in risks that investors need to be aware of. Market-cap weighted indexes, common in passive funds, can mean holding too much of overvalued stocks, especially at market highs, which raises the risk of losses during downturns. Because passive funds follow strict rules, they lack flexibility. They must buy or sell stocks during index changes even if the price isn't ideal, which can distort how prices are set and lead to mispriced assets. Passive funds are also directly exposed to market swings; they will fall along with the index during downturns, offering no buffer against broader market risk. Issues like index tracking errors and potential liquidity risks in less traded underlying securities also remain, along with the basic limitation of only matching market returns without generating extra gains (alpha).
Investor and Distributor Adoption
About 76% of retail investors are now familiar with index funds or ETFs, showing a big jump in awareness. Around 68% of investors held at least one passive fund in 2025, drawn by low costs, diversification, simplicity, and transparency. Distributors have also adopted passive strategies, with many understanding their usefulness and including them in client portfolios. They often plan to increase these allocations. Long-term investment goals, such as achieving financial independence and retirement planning, are primary drivers for adopting passive funds.
The Path Forward for Passive Investing
Analysts expect passive investing in India to keep growing, supported by ongoing digitalization, better financial understanding, and a preference for cost-effective, clear investment options. While market share is expected to rise, more complex passive products like factor and thematic ETFs signal a move toward more advanced passive options. The key challenge is understanding the specific risks of different index methods, like foreign ownership rules for MSCI indexes, and making sure passive strategies fit long-term goals.