Whalesbook
Investors in India are shifting their focus towards niche passive funds, such as thematic and factor-based (smart beta) products, seeking higher returns beyond traditional index funds. This growing preference is partly attributed to the consistent underperformance of many active mutual funds against their benchmark indices. The trend has led to a surge in new product launches; in 2025, 225 thematic and factor-based passive funds were added, compared to 183 in the entire year of 2024. Assets managed by these specialized funds have grown by 16% year-on-year, reaching ₹1.4 trillion as of July, according to a DSP Mutual Fund report.
Stock exchanges are actively supporting this shift by launching a variety of new indices. For instance, BSE Index Services Ltd introduced the BSE 500 Momentum Index and BSE India Sector Leaders Index, while NSE Indices Ltd rolled out the Nifty India New Age Consumption Index and Nifty 500 Multicap Momentum Quality 50 Index. These new indices provide mutual funds with the basis to create differentiated passive investment products.
Ashutosh Singh, Managing Director and Chief Executive at BSE Index Services, noted the rising interest in theme and factor-linked passive products and anticipates more innovative indices beyond traditional broad-market ones. Aniruddha Chatterjee, MD and CEO at NSE Indices, highlighted how innovation in sectoral, thematic, and smart beta strategies helps passive fund managers offer diverse products and continuously assess evolving investor demands.
The passive fund industry itself has seen substantial growth, with passive funds accounting for 17.4% of the total mutual fund industry's assets under management (AUM) in FY25, up from 17% in FY24 and 7.3% in FY20. The total AUM for passive funds has nearly quadrupled in the last five years to ₹12.91 trillion.
Impact:
This trend significantly impacts the Indian mutual fund industry, pushing innovation in product development and index creation. It offers investors more diversified and potentially higher-return options, shifting assets from traditional active funds to low-cost passive alternatives. It also highlights the evolving sophistication of Indian investors.
Rating: 7/10
Difficult Terms:
Passive Funds: Investment funds that are designed to track the performance of a specific market index, such as the Nifty 50. They are managed with minimal human intervention, aiming to replicate the index's returns at a low cost.
Indices: A statistical measure or benchmark that represents a segment of the market or the market as a whole. Indices are used as benchmarks for investment portfolios and as underlying assets for index funds.
Thematic Funds: Mutual funds that invest in companies involved in a particular theme or trend, such as clean energy, technology, or healthcare innovation.
Factor-based Funds (Smart Beta Funds): Investment funds that track indices based on specific quantitative factors (e.g., value, momentum, size, quality, volatility) that are believed to drive returns, aiming to offer better risk-adjusted returns than traditional market-cap-weighted indices.
Active Funds: Investment funds where a fund manager actively makes investment decisions, attempting to outperform a benchmark index by selecting specific securities.
AUM (Assets Under Management): The total market value of all financial assets that a financial institution, such as a mutual fund company, manages on behalf of its clients.
EPFO (Employees' Provident Fund Organisation): A statutory body under the Ministry of Labour & Employment, Government of India, that manages provident funds for employees in India.
AMCs (Asset Management Companies): Companies that manage mutual funds and other investment vehicles on behalf of investors.
Portfolio Management Services (PMS): A professional service where investment portfolios are managed by experienced professionals on behalf of clients.
Alternative Investment Funds (AIFs): Pooled investment vehicles that collect funds from accredited investors or institutional investors and invest them in assets other than traditional securities, such as private equity, venture capital, hedge funds, or real estate.
Multi-factor Indices: Indices that combine two or more investment factors (like value, momentum, size) into a single strategy to construct the index.
Specialised Investment Funds: Funds that focus on niche or alternative investment strategies, going beyond conventional equity, debt, or hybrid funds.