Indian investors are increasingly using passive funds like ETFs and index funds for targeted exposure beyond broad market indices. Data shows significant inflows into midcap, IT sector, and factor-based strategies, reflecting a shift toward building more precise investment portfolios.
Passive investing in India is moving toward a more specialized approach as investors seek to build portfolios with specific goals in mind. While traditional index funds that track the entire market remain popular, data from 2026 shows a clear trend toward using exchange-traded funds and index funds to target precise market segments and themes.
Strategic Shift to Targeted Indices
Investors have directed over ₹11,600 crore into passive products that track the Nifty Next 50, as well as specific midcap and smallcap indices. This movement suggests that many participants are looking beyond the largest 50 companies listed on the National Stock Exchange, aiming to capture growth in mid-sized and smaller firms that may offer different return profiles compared to the market leaders.
Sectoral Inflows and Factor Investing
Sector-specific passive funds are also gaining traction. The Information Technology sector has been a primary beneficiary, drawing more than ₹4,200 crore in inflows. This indicates that investors are using these low-cost vehicles to express specific views on sectors they believe are poised for long-term expansion rather than relying solely on broad-based market returns.
Beyond market capitalization and sectors, factor-based investing has moved into the mainstream. Strategies categorized as Value, Momentum, Quality, and Equal Weight attracted nearly ₹4,600 crore in 2026. These approaches use fixed rules to select stocks based on specific financial traits, such as company quality or price trends, a method previously used mostly by professional institutional managers. Interestingly, there has been a noticeable shift in preference toward growth-oriented factors, with data showing a cooling interest in defensive, low-volatility strategies.
Thematic Focus and Future Trends
Within the broader move toward precision, capital is becoming more concentrated in thematic funds that are supported by specific policy or economic shifts. Areas such as defence and capital markets have seen consistent attention, as investors prioritize themes with visible long-term potential over those driven by temporary market trends.
For individual investors, this shift offers more tools to fine-tune their asset allocation. However, the move toward specialized passive products requires a better understanding of how these funds work compared to standard index funds. While passive funds generally offer transparency and lower expense ratios than actively managed funds, investors should monitor the underlying index composition and the liquidity of these ETFs to ensure they can enter and exit positions effectively. The next important step for the market will be how these diverse building blocks are integrated into broader portfolios to manage risk while pursuing specific growth targets.