India’s investment ecosystem is undergoing a subtle but significant transformation. While active management has long been the dominant force in the mutual fund landscape, a quiet revolution is now taking root in the form of passive investing. Defined by its long-term orientation, cost-efficiency, and strategy of mirroring market indices rather than outperforming them, passive investing has matured from a fringe concept into a foundational element of prudent portfolio construction. This evolution is not just driven by performance metrics but by a confluence of market transparency, regulatory clarity, technological accessibility, and changing investor psychology.
As of March 2025, the Indian mutual fund industry surpassed ₹70 trillion in assets under management, a milestone reflecting both growing affluence and increasing financial participation. Passive investing accounts for nearly 17% of this total, a significant leap from just a few years ago. ETFs alone have exhibited an impressive annualized growth of over 35%, far outpacing the broader mutual fund industry. The number of investor folios in passive funds, now exceeding 3.5 crore, signals a deeper structural shift toward acceptance of index-based strategies by retail investors. The Indian investor, once captivated by the allure of active alpha, is beginning to appreciate the discipline and predictability offered by beta exposure.
The momentum India is experiencing today closely resembles the trajectory followed by the United States in the last two decades. Passive strategies in the U.S. now constitute close to 68% of all fund assets, driven by sustained underperformance of active managers, cost compression, and the rise of investor-centric giants like Vanguard and BlackRock. While India remains several steps behind in absolute scale, the direction of travel is unmistakably similar. Much like their global counterparts, Indian investors are becoming more cost-conscious, better informed, and increasingly skeptical of high-fee products that fail to consistently beat benchmarks.
It is important to contrast the philosophies of active and passive investing to appreciate this shift. Active funds are predicated on the manager’s ability to outperform the market through superior research, timing, and stock selection. While some managers do succeed over short periods, data from SPIVA reports consistently shows that 75 to 80 percent of active equity funds in India have underperformed their benchmarks over the long term. Passive funds, on the other hand, make no such promises. Their value proposition lies in simplicity, transparency, and minimal costs. Investors are not seeking to beat the market—they are seeking to own it, efficiently and quietly, without the distractions of constant decision-making.
The Indian marketplace today offers a growing array of passive products. Index funds and ETFs now track everything from the Nifty 50 to sector-specific indices, government bond indices, and even international benchmarks such as the S&P 500. Gold ETFs and Bharat Bond ETFs offer thematic and fixed income exposures, respectively, while newer entrants like smart beta and factor-based ETFs blend rule-based strategies with the passive structure. Index creation itself is a highly structured process, overseen by professional index providers who apply quantitative criteria such as market capitalization, liquidity, and sector representation to ensure investability and diversification.
For first-time investors, passive products serve as an ideal entry point. Their simplicity, low cost, and predictability lower the barriers to financial participation. For seasoned investors, they offer a way to diversify risk and bring down the total expense ratio of the portfolio. Passive funds do not aim to replace active management but to complement it. They form the stable core around which tactical active bets can revolve. This synergy between the two approaches is the hallmark of mature portfolio construction.
Advisors and mutual fund distributors have an instrumental role to play in accelerating this transition. Instead of viewing passive funds as threats to revenue, they must recognize the potential to build trust-based, fee-oriented advisory relationships. Passive investing is not about surrendering control but about embracing evidence-based investing. It empowers both the advisor and the investor with clarity, simplicity, and data.
What makes passive investing particularly compelling is its alignment with investor psychology. Behavioral finance has long shown that most retail investors are their own worst enemies, falling prey to biases like overconfidence, loss aversion, and herd behavior. Passive investing mitigates these biases by removing the need to make frequent decisions. It encourages a long-term mindset, discourages performance-chasing, and provides comfort through consistency. In many ways, it is a behavioral antidote to the stress and noise of modern markets.
Looking ahead, the future of passive investing in India is bright. As regulatory bodies push for cost transparency and investor education deepens, passive funds are poised to become mainstream. The next wave of growth will likely come from thematic indices, global diversification, and solutions-oriented passive hybrids. This is not merely a shift in strategy—it is a shift in mindset. In an age defined by information overload and decision fatigue, the quiet discipline of passive investing offers both a refuge and a roadmap.
References
Association of Mutual Funds in India. (2024). Annual Report 2023–24. Retrieved from https://www.amfiindia.com
Cafemutual. (2024, September 15). Passive fund folios cross 3.5 crore mark. Retrieved from https://cafemutual.com
ICRA Analytics. (2025, March). Indian Mutual Fund Industry Crosses ₹70 Trillion in AUM. The Economic Times. Retrieved from https://economictimes.indiatimes.com
Morningstar. (2024, December). Active Funds Trailed Passive Peers in 2024. Morningstar Research. Retrieved from https://www.morningstar.com
S&P Dow Jones Indices. (2023). S&P Indices Versus Active (SPIVA) India Scorecard. Retrieved from https://www.spglobal.com/spdji/en/research-insights/spiva