Whalesbook
Active Funds Lose Market Share
Actively managed equity mutual funds in India are losing ground, seeing their share of total industry assets under management (AUM) drop from 44.8% to 43.4% in fiscal year 2026. This marks a significant shift after years of steady growth. A key driver of this trend is the substantial cost difference between active and passive funds. Active funds typically charge expense ratios between 1% and 2.5% (averaging around 1.5%), while passive funds are much cheaper, costing between 0.05% and 0.5%. For instance, index funds tracking the Nifty 50 often cost just 0.2% to 0.3%. Historically, passive funds have proven they can match or beat many active large-cap equity funds, partly due to these lower costs. Data from 2025 shows about 65-66% of active large-cap funds underperformed their benchmarks. While active management still plays a role in niche areas like mid and small-cap stocks or specific themes, most investors are now leaning towards passive options. Passive fund AUM has surged to represent roughly 17% to 19% of total mutual fund assets, up from less than 3% a few years ago.
Gold and Silver ETFs See Record Inflows
Gold and silver Exchange Traded Funds (ETFs) have also attracted significant investor attention, with inflows reaching unprecedented levels. In January 2026, net gold ETF inflows hit an all-time high of ₹24,040 crore, exceeding even equity mutual fund investments that month. This demand is fueled by global events such as geopolitical tensions, inflation worries, a fluctuating US dollar, and interest rate outlooks, all of which boost gold's appeal as a safe haven. Despite a sharp sell-off in mid-March 2026 (gold down over 10%, silver over 15%) after the US Federal Reserve signaled potential interest rate hikes, investor interest in these metals as a hedge against currency and market risks remains strong. These sustained inflows highlight a preference for assets perceived as stable amid growing global uncertainty and volatile riskier assets.
SIPs Fuel Active Fund Growth, Masking Weakness
While active equity's overall market share declined, the segment still saw an 8.6% increase in AUM during FY26. This growth, however, was primarily driven by Systematic Investment Plan (SIP) inflows, which account for nearly 80% of assets flowing into active equity schemes. SIPs rose to ₹3.5 trillion in FY26 from ₹2.9 trillion in FY25. This heavy dependence on regular SIPs, alongside weak lump-sum investments and modest market-driven gains, exposes active equity funds to potential risks. It indicates that their growth relies more on established investor habits than a strong conviction in performance, making them vulnerable to changes in market sentiment and fund flows.
Regulatory Changes and Industry Shifts
The Indian mutual fund industry is experiencing significant structural changes. Passive fund assets have grown nearly sevenfold over the past five years, signaling a phase of sustained expansion for passive investing. These shifts are amplified by regulatory updates designed to boost transparency and safeguard investors. New SEBI rules, starting April 1, 2026, introduce a revised expense framework. This includes clearer definitions for Base Expense Ratio (BER) and potential performance-linked fees, which may further pressure active fund management costs. Additionally, AMFI's regular reclassifications of stocks can influence fund flows as managers realign portfolios to meet category requirements.
Challenges Facing Active Funds
Several factors contribute to a cautious outlook for active equity funds. The growing dominance of passive funds in major market indices sparks concerns about potential distortions in price discovery and amplified losses during downturns from market overcrowding. The consistent cost advantage of passive funds continues to push down active fund fees, requiring active managers to generate superior returns (alpha) to justify their higher charges. However, historical data shows a significant number of active funds, especially in large-cap segments, have failed to outperform their benchmarks over time. This means many investors might be paying higher fees for average or below-average market returns. The reliance on SIPs for growth also suggests a potential lack of strong conviction in active fund performance, leaving the segment vulnerable to disruptions in this inflow source.
Outlook: Passive Core, Active Niches
The trend of passive funds dominating broad market indices is expected to continue. The mutual fund industry is likely to become more segmented, with low-cost passive options forming the main part of most investors' portfolios. Active strategies will probably be used more in specialized segments or niche areas where generating alpha is still feasible and justifies higher fees. As a result, many investors are choosing a balanced approach, combining the cost benefits and stability of passive funds with the growth potential from carefully selected active strategies. This helps them manage market volatility and work towards their long-term goals. Demand for gold and silver ETFs may also persist as investors look for diversification and hedging tools amid ongoing economic uncertainties.