India’s passive investment market is shifting as retail investors increasingly choose index funds over ETFs. While ETFs held a larger market share historically, index funds grew to a 22.4% share by March 2026. This trend is driven by the convenience of automated SIPs, though investors should watch for potential regulatory limits on new passive fund launches.
The landscape of passive investing in India is undergoing a clear change. Retail investors, who form the backbone of the mutual fund industry, are increasingly moving away from exchange-traded funds (ETFs) and opting for index funds. As of July 2026, the total assets under management (AUM) for the passive fund industry—which includes both index funds and ETFs—reached ₹15.15 lakh crore, accounting for roughly 18% of the entire mutual fund industry.
Data indicates a sharp rise in the popularity of index funds. Their share of passive assets grew to 22.4% by March 2026, up from just 6.2% in March 2021. Conversely, the market share of ETFs (excluding gold) declined to 65.1% over the same period, down from 89.2% five years earlier. This movement reflects a growing preference among small investors for rule-based, low-cost investment options.
Why Retail Investors Prefer Index Funds
The primary driver for this shift is convenience. Investing in an ETF typically requires a Demat account and involves trading on the stock exchange, similar to buying shares. This introduces complexities like bid-ask spreads—the difference between the price at which you buy and sell—and the need to track intraday net asset values.
In contrast, index funds operate like traditional mutual funds. Investors can set up automated systematic investment plans (SIPs), which remove the need to manage trade execution or monitor market hours. Many retail investors find that while ETFs often have a lower expense ratio on paper, the total cost of ownership—including brokerage fees and the hidden costs of trading—can make index funds more practical for long-term wealth creation.
Regulatory and Market Context
While the growth of passive funds is strong, the sector is also facing regulatory scrutiny. Given the rapid increase in the number of new passive fund launches, the Securities and Exchange Board of India (SEBI) is currently evaluating potential limits on how many passive funds a single asset management company can launch in a specific category. The goal of this regulatory review is to reduce investor confusion caused by a crowded product shelf.
Investors should also consider the inherent risks associated with this asset class. While passive funds offer low-cost exposure to markets, they are subject to market volatility. Furthermore, as thematic and sectoral index funds become more common, investors face concentration risk—where their portfolio might be too heavily focused on a single sector or theme that could underperform at any given time.
What Investors Should Track Next
The most important monitorable for those invested in or considering passive funds is the upcoming regulatory stance from SEBI. Any caps on the number of new fund launches could alter the variety of products available to investors. Additionally, as index fund popularity continues to rise, the performance gap between these funds and their respective benchmarks will remain a critical metric for long-term investors to watch.