Passive mutual fund assets in India have climbed to Rs 15.15 lakh crore, accounting for nearly 18% of the total industry's Rs 85.76 lakh crore assets. Growing retail adoption and a preference for cost-efficient index funds and ETFs are driving this trend. While passive investing is becoming a portfolio staple, investors should stay aware of risks like tracking errors and market volatility.
The Indian mutual fund industry has hit a significant milestone, with assets under management (AUM) in passive schemes reaching Rs 15.15 lakh crore as of July 2026. This figure represents approximately 18% of the total mutual fund industry, which stands at a record Rs 85.76 lakh crore. The rapid growth from Rs 12.18 lakh crore just one year ago highlights a clear shift in how both retail and institutional investors manage their portfolios.
Drivers of the Passive Shift
The move toward passive strategies is largely driven by a search for cost-efficiency. Index funds and exchange-traded funds (ETFs) generally carry lower expense ratios compared to their active counterparts. This has made them an attractive option for investors looking to build long-term, stable portfolios. Within the passive segment, domestic equity funds dominate the landscape, representing about 68.4% of total passive assets. Beyond standard equity indices, diversification into gold and silver ETFs has also contributed to the rise in assets.
This trend is further supported by the performance of active large-cap funds. Data indicates that many active large-cap schemes have struggled to consistently beat their benchmarks, prompting investors to pivot toward passive vehicles. Rather than trying to select a fund manager who can outperform the market, many investors are opting to mirror the broader market returns through passive funds.
Risks and Monitorables for Investors
While passive investing offers transparency and lower costs, it is not without risks. One key factor for investors to monitor is tracking error. This occurs when the returns of an index fund or ETF deviate from the returns of the underlying index they are meant to replicate. A consistently high tracking error can erode the expected benefits of the investment.
Furthermore, passive funds are inherently exposed to broader market volatility. If the underlying index falls, the passive fund falls with it, as there is no active manager to shift the portfolio to defensive stocks or cash. Recent data also shows that debt-related passive funds have experienced some net outflows, suggesting that these instruments can be sensitive to interest rate changes and liquidity conditions. Additionally, investors should remain mindful of potential regulatory changes from SEBI, as the regulator continues to update categorization and rationalization frameworks for mutual fund schemes.
Moving forward, the role of passive investing is expected to evolve alongside active management. Many investors are now adopting a hybrid approach, using passive funds to capture baseline market returns while retaining active managers for specific alpha opportunities. The next phase of growth will likely depend on whether this segment continues to attract retail participation and how well fund houses manage tracking errors as the number of available indices expands.