Why share of passives still remains small in India's mutual fund industry

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Actively managed equity funds in India are finding it harder to beat their benchmark. For five-year return periods ending in 2025, large-cap schemes trailed the Nifty 100 Total Return Index (TRI) 41% of the time, according to a rolling return analysis based on data from Ace MF. Mid-cap funds lagged the Nifty Midcap 150 TRI in 69% of such periods.

Small-cap funds held up slightly better. In five-year periods ending in 2025, they underperformed the Nifty Smallcap 250 TRI 40.6% of the time. Over the years, small-cap schemes have shown more instances of outperformance versus their benchmark than large- and mid-cap funds have. (see: gfx)

Yet passive funds—index funds and exchange-traded funds (ETFs) that simply track a benchmark—account for barely one rupee in every six invested in Indian mutual funds.

Growth in passive funds has been overwhelmingly corporate-led: corporates held 73% of India's ₹12.92 trillion in passive assets as of December 2025, against just 8% for retail investors (Association of Mutual Funds in India). Domestic index funds and ETFs have grown nearly fivefold in five years, from ₹2.71 trillion in 2020, while investor folios grew almost ninefold, to 3.83 crore, over the same period.

Even after that surge, passive funds’ share of the mutual-fund industry’s total assets rose only from 8.75% in 2020 to 16.11% in 2025. A wealth manager, who has worked in India and now advises globally mobile Indians for a multinational bank, and who requests anonymity, puts it plainly: “Passive investing is still at a relatively early stage in India.”

That is a world away from the US, which is considered one of the most developed capital markets. There, passively managed open-end funds and ETFs held 54.8% of fund assets at the end of 2025, up from 42.5% in 2020, according to Morningstar data.

Underperformance is only part of the story. “Underperformance certainly contributed, but higher fees also play a part in the US,” says Zachary Evens, a manager-research analyst at Morningstar. “Actively managed mutual funds are, on average, more expensive than passive funds. Fees come directly out of returns, and investors have overwhelmingly preferred low-cost funds, which tend to be passive.”

Distribution economics can help to explain this to some extent. “Active funds generally pay higher commissions and trail income than passive funds,” the wealth manager pointed out. “Since passive funds simply replicate an index, the fund manager’s role is limited, and the expense ratio is much lower. Naturally, the commissions available to distributors are also lower,” he said.

“The biggest advantage of a fee-based advisory is that it can help to minimize product bias to some extent,” said Lovaii Navlakhi, managing director and chief executive officer of International Money Matters.

But the tide seems to be changing with the launch of fund houses that focus on passive funds. According to Vishal Jain, chief executive of Zerodha Mutual Fund, points out that investor behaviour has shifted in step with the products on offer. He identified three phases. The first was simple substitution: investors swapping individual stocks or expensive active funds for large-cap, diversified passive funds (ETFs/Index Funds). The second came as gold passive, target-maturity bond passive and products linked to international indices became accessible, and investors began “thinking about them as an efficient way to access multiple asset classes.” The result, Jain said, is that today’s retail investor is asking a different question entirely: not “which equity fund should I buy?” but “how do I allocate across domestic equity, international equity, debt and gold?”

Navlakhi frames the broader choice between active and passive not as binary but as a matter of core and satellite. Client portfolios, he says, are typically built in layers, with index funds “the first port of call” before mon...