Passive investing is no longer just about capturing market returns at a lower cost. Investors are using index-based products to express specific investment views across market-cap segments, sectors, factors and structural themes, while retaining the discipline and transparency of rules-based investing.
In other words, the conversation is shifting from whether to invest passively to how passive strategies can be combined to build more purposeful portfolios.
One of the clearest signals comes from market-cap allocations.
During 2026 so far, passive products tracking the Nifty Next 50, Midcap and Smallcap indices together attracted over ₹11,600 crore. Rather than concentrating solely on India’s largest companies, investors appear to be broadening their exposure to different segments of the equity market, recognising that future growth is likely to come from multiple parts of the economy.
The same selectivity is evident in sectoral allocations. Information Technology alone garnered more than ₹4,200 crore across passive funds during the year, suggesting investors are using ETFs and index funds to express conviction on sectors they believe are well positioned for long-term growth, rather than simply buying the entire market.
Perhaps the most significant evolution is in factor investing. Strategies based on Value, Momentum, Quality and Equal Weight together attracted nearly ₹4,600 crore in CY2026. Not long ago, factor investing was largely the preserve of institutional investors and sophisticated market participants. Today, its growing acceptance indicates that a wider set of investors is becoming comfortable with rules-based strategies that seek specific investment characteristics beyond traditional market-cap weighting.
The divergence in flows also reveals changing investor preferences. While quality, value and momentum strategies continued to attract capital, Low Volatility indices saw net outflows. One year’s data does not establish a lasting trend, but it does suggest that investors are currently prioritising participation in growth opportunities over more defensive positioning.
A similar pattern is emerging within thematic investing. Rather than chasing every new theme that comes to market, inflows have remained concentrated in structural opportunities such as Defence and Capital Markets. This suggests investors are becoming more discerning, favouring themes supported by long-term policy priorities, economic transformation and earnings potential over short-lived market narratives.
Taken together, these trends reflect a broader shift in how passive investing is being used.
Put simply, many investors are now using passive investing in two layers. The first is a broad-market index fund that forms the core of the portfolio. The second involves smaller allocations to areas where they want additional exposure, whether midcaps, IT, quality, momentum or defence. This allows them to stay diversified while tilting the portfolio towards specific opportunities.
This evolution is expanding the role of passive investing beyond cost-efficient market participation. Index funds and ETFs are becoming portfolio building blocks that allow investors to combine diversification with precision, while preserving the transparency, consistency and discipline that passive investing offers.
The next phase of India’s passive investing journey may therefore be defined less by the active-versus-passive debate and more by how thoughtfully investors use passive building blocks to construct portfolios suited to their long-term goals.
Passive investing itself hasn’t changed. The way investors are using it certainly has.
-Neha Rathi is Fund Manager at DSP Mutual Fund
