India’s passive mutual fund assets have jumped nearly fivefold to ₹12.92 trillion since 2020. However, these funds still account for only 16% of total industry assets, as many retail investors continue to favor actively managed schemes despite their recent struggles to beat benchmark returns in several market segments.
Detailed Coverage
The landscape of Indian mutual funds is witnessing a steady shift toward passive investing, as index funds and exchange-traded funds (ETFs) gain traction among a broader investor base. By the end of 2025, total assets in passive schemes reached ₹12.92 trillion, marking a significant increase from ₹2.71 trillion just five years prior. Despite this growth, passive instruments currently represent only about 16% of the total mutual fund assets in India, leaving them far behind the United States, where passive assets constitute nearly 55% of the market.
Challenges for Actively Managed Funds
A key driver behind this shifting preference is the performance gap in actively managed equity funds. Recent data indicates that many active schemes have struggled to outperform their benchmark indices. Specifically, large-cap funds failed to beat the Nifty 100 Total Return Index in 41% of five-year rolling return periods ending in 2025. The mid-cap segment faced even greater difficulty, with 69% of funds underperforming the Nifty Midcap 150 index. Small-cap funds showed relatively better resilience, though they still lagged their benchmarks in over 40% of the reviewed periods.
The Role of Corporate and Retail Investors
While the growth in passive assets has been substantial, the ownership structure reveals a heavy reliance on institutional money. Corporate investors currently account for 73% of total passive assets, while retail investors hold only 8%. This indicates that while awareness is spreading, retail adoption of passive strategies remains in the early stages compared to institutional use. Nevertheless, the total number of retail folios in passive funds has surged nearly ninefold to 3.83 crore, suggesting that individual investors are gradually beginning to diversify their portfolios with index-based products.
Strategic Shifts in Portfolio Allocation
Financial advisors are increasingly moving away from simple fund-picking toward a more holistic asset allocation model. This approach often involves a core and satellite strategy, where index funds form the foundation of a portfolio to ensure low-cost exposure to the broader market, while active funds are used selectively in areas where managers may still find opportunities to beat the index. This is particularly relevant for mid-cap and small-cap segments, where market inefficiencies may still allow active managers to deliver higher returns than the benchmark.
Investor Monitorables for the Future
The ongoing debate between active and passive management will likely depend on future expense ratios and the ability of active fund managers to navigate a more researched market. As the Indian market matures and more information becomes available to the public, the potential for managers to identify undervalued stocks may decrease, potentially pushing more investors toward passive options for large-cap exposure. Investors should monitor the expense ratios of their current active holdings and compare their long-term performance against passive alternatives to determine if the extra cost provides sufficient value.