India’s passive fund boom explained: Where index funds work, where active still wins

Passive mutual funds are fast moving from the margins to the mainstream of India’s investment landscape. Once seen largely as institutional tools, these low-cost, index-tracking products now account for nearly 17–19% of the mutual fund industry’s total assets under management (AUM)—a sharp jump from less than 1% a decade ago.

The rise reflects a clear shift in investor behaviour: growing cost awareness, comfort with market-linked returns, and a preference for simplicity at a time when fund choices have exploded. In a conversation with CNBC-TV18, Pratik Oswal, Chief of Passive Business at Motilal Oswal AMC, and Aditya Agarwal, Co-Founder of Wealthy.in, laid out why passive funds are gaining traction, where they work best, and why active management still has a role in Indian portfolios.

From niche to nearly one-fifth of MF AUM

In developed markets such as the US and Europe, passive strategies already dominate, accounting for more than 50–55% of mutual fund assets. India is still some distance from that level, but the direction of travel is clear.

Oswal points out that the growth has been both rapid and broad-based. “Ten years ago, passives were less than 1% of the entire mutual fund AUM. Today, they are close to 18–19%,” he said. What has changed in recent years is the composition of investors. Earlier, passive funds were largely institutional. Since Covid, retail and HNI participation has risen meaningfully.

The result is that passive funds are no longer peripheral products. “Most investors today are probably looking at having at least one or two passive funds in their equity portfolio,” Oswal added.

Why simplicity—not just cost—is the real draw

Low expense ratios are often cited as the biggest advantage of passive funds. With costs running into just a few basis points, index funds are significantly cheaper than actively managed equity schemes, which typically charge 2–2.5% annually.

However, both experts argue that simplicity may be an even more powerful driver than cost.

“In today’s market, investors are faced with too many choices,” Oswal said. “If someone wants exposure to mid-caps, they don’t want to choose between 10 or 15 different funds. Buying the mid-cap index gives them instant exposure without that complexity.”

Agarwal echoes this view, noting that the largest flows into passive products have gone into simple, well-understood indices such as the Nifty 50 and Sensex, and more recently into gold ETFs and gold index funds. “Passives are meant to be simple products. It’s encouraging that what’s getting adopted are the simplest options,” he said.

Gold, India’s second-largest asset class after real estate, is a case in point. As prices track global commodity markets, Agarwal believes passive funds are the most efficient way for investors to gain exposure. “An ETF or a low-cost index fund is the best way to invest in gold,” he said.

Market efficiency is reshaping the large-cap debate

Another factor underpinning the shift towards passive investing is the changing nature of Indian equity markets. Oswal argues that markets today are far more efficient than they were a decade or two ago, particularly in the large-cap space.

“The kind of outperformance we used to see in large-cap funds has become quite muted,” he said. Over the past five years, flows into passive large-cap schemes have exceeded those into active large-cap funds, reflecting investor focus on net-of-cost returns.

For long-term investors—those with 15-, 20-, or 25-year horizons—the challenge of picking a consistently outperforming active fund is significant. “If you go passive, it’s likely to be around for the long term,” Oswal said, pointing to the S&P 500’s multi-decade track record in the US as an example of how simple index exposure can deliver wealth over time.

Active vs passive: where each strategy fits best

Despite the strong case for passive investing, both experts stress that passive is not a one-size-fits-all solution.

Agarwal draws a clear distinction between large-cap investing and the rest of the market. “In mid-cap, small-cap and thematic funds, I remain a firm believer in active management,” he said. According to him, India’s status as a developing economy means there are still inefficiencies that skilled fund managers can exploit.

Also Read | ICRA Analytics shows children’s mutual funds AUM up 160% in 5 years: Check top performing schemes

Active managers, he argues, have the flexibility to take higher conviction bets—particularly on companies that may graduate from mid-cap to large-cap status—something an index fund cannot do due to fixed weightings. “Good fund managers can generate 3–5% alpha, and the additional expense is often justified,” Agarwal said.

Oswal broadly agrees with this framework. While passive funds are increasingly becoming the default choice for large-cap exposure, active management continues to have relevance in segments where research depth and stock selection matter more.

How investors should think about passive funds

Taken together, the message is not about choosing sides, but about using each tool appropriately.

Passive funds offer investors:

• Low costs
• Transparent, rules-based investing
• Simplicity in portfolio construction
• Predictable, index-linked returns over the long term

Active funds, on the other hand, still play a role where market inefficiencies are higher and skilled managers can add value.

As India’s mutual fund industry deepens and investor awareness grows, passive funds are likely to occupy a steadily larger share of portfolios. But the most effective strategy, experts suggest, will be a balanced approach—using passive funds as the core, particularly in large caps, and active funds selectively in segments where alpha opportunities remain.

For investors navigating an increasingly crowded fund universe, that balance may be the key takeaway from India’s passive investing revolution.

Also Read | This mutual fund has turned ₹10,000 monthly SIP into over ₹17 crore in 31 years

Watch accompanying video for entire discussion.