A structural change is visible in Indian passive investing. ETF market share has dropped from 89.2% in 2021 to 65.1% by March 2026, while index fund assets reached ₹3.07 lakh crore. Investors are increasingly choosing the simplicity of automated SIPs over the trading complexities associated with ETFs.
The way Indian retail investors participate in the market is changing. For years, Exchange Traded Funds (ETFs) were the primary choice for those looking for low-cost, passive investing. However, data from March 2026 shows that the dominance of ETFs is fading. Their market share in the passive investment space has fallen to 65.1%, down from 89.2% in March 2021. Meanwhile, index funds have emerged as the preferred alternative, with their assets reaching ₹3.07 lakh crore after growing at a five-year compound rate of 74.1%.
Convenience Over Cost Efficiency
The shift is largely driven by the difference in how these two products are bought and sold. ETFs function like individual stocks; they require a demat account, and investors must deal with brokerage fees, bid-ask spreads, and liquidity issues—meaning they have to find a buyer or seller on the exchange to complete a trade. Many retail investors find these steps to be a hurdle.
In contrast, index funds operate like traditional mutual funds. Investors can set up automatic Systematic Investment Plans (SIPs) without needing to monitor the market for price movements. This hands-off approach appeals to those who want to build wealth consistently without managing exchange-related trading. Even though index funds often have higher expense ratios than ETFs, many investors seem willing to pay this premium for the administrative ease and the ability to automate their savings.
The Role of Distributors
Financial intermediaries and distributors have also influenced this trend. There is often a difference in the commission structures for these products, with distributors frequently earning higher fees for selling index funds compared to ETFs. As a result, distributors have a financial incentive to steer retail capital toward index funds. With about 78% of smaller SIP contributions currently facilitated through these networks, the guidance provided by distributors plays a major role in shaping where retail money goes.
What Investors Should Monitor
While the shift to index funds simplifies the investment process, it is important for investors to be aware of the trade-offs. The primary drawback is the cost difference; because index funds typically have higher expense ratios, they can slightly reduce net returns over a very long period compared to the lowest-cost ETFs.
Additionally, there is a difference in pricing. ETFs provide real-time pricing throughout the trading day, whereas index funds are priced only once at the end of the day based on their Net Asset Value (NAV). This means index fund investors cannot enter or exit based on intraday market swings. Investors should track whether the cost gap between index funds and ETFs narrows in the future, as well as whether sustained high inflows into index funds continue to drive their growth in the broader mutual fund industry, which managed a total of ₹73.73 lakh crore in assets as of March 2026.