While inflows into index funds moderated during the month after strong recent inflows, industry experts say the broader shift towards passive investing remains structurally strong, driven by growing financial awareness, easier digital access and rising preference for transparent, rule-based investing.
Passive investing, once largely seen as a niche strategy, is becoming part of mainstream portfolio construction as investors look for simpler and cost-efficient ways to participate in long-term market growth.
Kailash Kulkarni, CEO, HSBC Mutual Fund, said passive investing has seen strong adoption globally due to investor preference for cost efficiency, simplicity and transparency. In India, he said, wider product availability and easier access to index products are accelerating participation.
D P Singh, Joint CEO, SBI Mutual Fund, said investors are informed and focused on long-term outcomes, while digitisation and broader access to ETFs and index funds have made passive investing more accessible, especially for first-time investors.
What is passive investing?
Passive investing involves investing in funds that replicate a market index instead of relying on active stock selection by fund managers.
For example, a Nifty 50 index fund invests in the same companies that form the benchmark index and in similar proportions. The aim is to mirror market performance rather than outperform it.
The most common passive products include:
- Index funds
- Exchange-traded funds (ETFs)
Since these funds follow predefined investment rules and require lower active management, they usually carry lower expense ratios compared to actively managed mutual funds.
Why are investors shifting towards passive funds?
Industry experts say investors are prioritising simplicity, diversification and lower costs while building long-term portfolios.
Anand Vardarajan, Chief Business Officer, Tata Asset Management, said passive funds provide diversified market exposure without requiring investors to select individual stocks. He added that wider product availability and increasing awareness have made the category more accessible over time.
Lower costs are another major attraction. Since passive funds do not rely heavily on active research and stock-picking, management expenses are generally lower — an advantage that can meaningfully improve long-term returns.
Bhautik Ambani, CEO, AlphaGrep Mutual Fund, said passive products offer a disciplined way to participate in markets while reducing dependence on discretionary fund manager decisions. He also noted that globally many active managers have struggled to consistently outperform benchmark indices after costs.
Passive investing moving beyond Nifty and Sensex
Experts say the passive investment landscape in India is gradually expanding beyond traditional large-cap index funds.
While Nifty and Sensex-linked products remain the core of passive allocations, investors are exploring sectoral ETFs, thematic funds, smart beta products and factor-based strategies.
Kulkarni said India could gradually witness a similar evolution to global markets where passive investing has expanded beyond plain vanilla index products into more targeted and diversified offerings.
Vardarajan added that investors today can access passive exposure across sectors such as banking, pharma, manufacturing and technology, along with factor-based approaches linked to momentum, alpha and low volatility.
Should investors choose passive or active funds?
Fund managers largely believe passive and active investing are complementary rather than competing approaches.
Singh said passive strategies can provide low-cost core market exposure, while active funds may continue to play an important role in segments where market inefficiencies exist or selective positioning matters.
Experts suggest the right balance depends on factors such as financial goals, risk appetite and investment horizon.
Risks investors should keep in mind
Despite their growing popularity, passive funds are not risk-free.
Since they mirror underlying indices, passive funds remain fully exposed to market corrections. Experts also caution that certain indices can become concentrated in a few sectors or stocks during strong rallies, increasing concentration risk.
Tracking error, liquidity and ETF bid-ask spreads are additional factors investors should evaluate.
Ambani said some factor-based or smart beta strategies can witness prolonged underperformance when market leadership changes, while Vardarajan cautioned that sectoral and thematic passive products should not be treated as one-size-fits-all investments.
