Passive investors are generally looked down upon. Aggressive is in. It is by taking charge that one makes money, lots of it. Allowing the money to lie idle in the banks stales returns. However, things have changed in the recent past. Passive investing, or seemingly-docile and inert stock-buying strategies, which were once shunned or considered niche and quaint, has become mainstream. This is especially true in India’s mutual fund landscape.
A recent investors’ survey by a brokerage house, Motilal Oswal, on passive funds, which covered a small respondents’ base of 3,000, shows a structural shift in retail investment. According to it, just above three-fourths of the surveyed individuals were aware of passive funds, of which nearly 90 per cent were invested in passive mutual funds, which included at least one index-linked fund or exchange-traded one. On an overall basis, the assets under management (AUM) in passive funds grew more than six times to more than Rs 12 lakh crore in the last six years (as of August 2025).
What is more crucial is that 85 per cent of the respondents said that they plan to hold the passive mutual funds for more than three years. This suggests that they view the investment as a medium-to-long-term one, and are not interested in get-rich-quick wealth creation tools. More than half claimed that their investment style is through SIPs (26 per cent only SIP; regular Systematic Investment Plans), and lump sum investments (17 per cent only lump sum). “The growing use of hybrid strategies, mixing SIPs with lumpsum investments, shows that investors want both sustained market participation, and tactical opportunities,” stated the report. More than two-thirds hold ETFs (exchange-traded funds), which is up from a tad over 40 per cent in 2023, or a jump of more than 60 per cent.
The reasons for this shift from specific stock pickings by individuals, or dependence on experienced fund managers, who work their magic in active funds, which continuously rotate money in stocks, to passive funds, are obvious. As the Motilal Oswal study found, more than half of the respondents were enamoured by the low costs, and just under 50 per cent each were excited by the passive funds’ diversification strategy, and simplicity. The appeal lies in structural benefits such as efficiency, transparency, and predictability.
Lower expense ratios are an integral part of the passive funds since, unlike the active funds, the former eliminate the need for the fund managers. As these funds merely mirror the specified indices, the investment strategies are implicit and automatic. Hence, the fees range between 0.1 per cent and 0.5 per cent, which implies that higher percentages of the investors’ money stays invested. The returns are obviously higher due to lower subtractions.
In addition, there is a certain simplicity to the passive funds. Since the portfolios replicate an index, the investors can easily see how and where their money is invested, and understand the whys. There are no risks attached due to possible mistakes and wrong decisions by the fund managers, which cuts out the emotional quotient too. Although the sway of sentiments remains since the indices too are moved by investors whims and fancies, apart from facts.
Diversification under passive investing was a key factor for almost 50 per cent of the respondents who participated in the survey. The funds allow investors to move away from limiting themselves to the broad equity indices, like Nifty 50 or Sensex, and allocate funds to certain sectors, and themes, and benefit from global trends, and smart beta strategies. More than 60 per cent of the respondents held at least one smart beta fund, with a focus on factors such as momentum (40 per cent), quality (37 per cent), and value (35 per cent).
While acknowledging that interest in smart beta has increased, the survey noted, “Among the adopters, 48 per cent cite performance potential as the main reason for investing, while others value risk management benefits from factors like low volatility. Though still niche, smart beta is drawing increasing interest from informed investors seeking differentiation beyond plain market-cap indices.”
Broadening of the allocation base was reflected in the product mix. Although nearly 80 per cent of the respondents invested in the broad-based equity indices, 37 per cent opted for gold or silver ETFs, and a fourth in international equities. This indicated that investors now seek multi-dimensional, multi-faceted, and multi-asset portfolios.
Passive funds are considered a disciplined, and transparent way to invest, and they are well-suited for long-term SIP investors, who want market exposures without dependence on the fund managers. Due to possible and automatic diversifications across indices, and within an index, the funds eliminate risks that are generally attached with single stocks, or a group of stocks. However, investors need to review several factors such as tracking errors, AUMs, and expense ratios before choosing a specific fund.
No wonder that more than 70 per cent of the respondents planned to increase allocations in passive funds in 2025-26. Indeed, more than 50 per cent had already done it in the past 12 months. “The steady rise in allocations suggests that passive product growth is structural, not cyclical, driven by investor preference for cost-efficient, transparent, and rules-based strategies,” stated the survey.
However, remember that passive funds come with their own risks. Since they replicate an index, they move in tandem with it, rising and falling as the markets do. This implies that they lack both downside protection, and the flexibility to adjust. Another drawback is tracking error, i.e., the gap between a fund’s returns and its benchmark. This becomes more pronounced in mid- and small-cap indices due to illiquid stocks or delays in rebalancing. Liquidity and pricing gaps in ETFs, particularly the smaller ones, impact returns.
Even the mutual funds distributors are enthused by the passive funds. The survey showed that nearly seven in 10 polled distributors “include passive funds in their offerings, underscoring their growing role in clients’ portfolios.” Their reasons for doing so are akin to those of the investors: diversification benefits, risk mitigation, and ease of understanding (and explaining) passive products. More than 90 per cent of the distributors have a basic understanding of the funds, of which half “demonstrate deep knowledge of these products.”
According to the distributors, “millennial clients show the strongest interest in passive funds, followed by the Gen-X age group.” This proves that the passive funds appeal more to the group between 40-60 years, which is the most productive and among the highest-earning cohort. Both investors and distributors reflect a huge change: Passive funds are longer merely low-cost add-ons but are considered essential components of future-ready portfolios. Hence, their role is “set to expand meaningfully” in the country’s wealth ecosystem.
