According to Tata Mutual Fund’s Passive 360 – June 2026 report, passive funds’ share of the mutual fund industry rose to around 18% in April 2026 from about 7% in 2020.
Passive fund assets have also grown sharply, reaching ₹14.74 lakh crore, the report said.
The trend continued in July, with passive funds recording net inflows of about ₹12,517 crore, including ₹1,537 crore into index funds and ₹9,510 crore into other ETFs.
But what exactly does passive investing mean, and how do different indices work?
Passive investing is more than the Nifty 50
A passive fund tracks a predetermined index instead of relying on a fund manager to select stocks.
The Nifty 50 is the best-known example, but investors can choose from indices covering different segments of the market.
The Nifty Next 50 comprises 50 companies from the Nifty 100 after excluding Nifty 50 constituents. The Nifty Midcap 150 covers mid-sized companies, while the Nifty Smallcap 250 represents companies ranked 251–500 within the Nifty 500, subject to eligibility criteria.
Investors can access these segments through index funds and ETFs. A broad-market index such as the Nifty 500 provides exposure to large-, mid- and small-cap companies through a single index.
Why do index constituents keep changing?
An index is not a fixed list of companies.
The composition changes periodically based on predefined rules. For instance, when an eligible Nifty Next 50 company moves into the Nifty 50, it exits the Next 50 and another eligible company can take its place.
Similarly, a Smallcap 250 company that moves into the Midcap 150 can exit the Smallcap 250, with another eligible company entering the index.
The Nifty Next 50 and Nifty Smallcap 250 are reconstituted semi-annually, with changes generally taking effect towards the end of March and September.
This means an investor tracking an index gets exposure to a portfolio that changes as companies’ market capitalisation and eligibility change, without having to make those individual buy-and-sell decisions.
Chintan Haria, Principal – Investment Strategy, ICICI Prudential AMC, described this as a “self-renewing portfolio”, where companies that improve their relative standing can move up the market-cap ladder while those that lose their position can move out.
The Sensex itself shows how markets evolve
The changing composition of indices is not a new phenomenon.
Tata Mutual Fund’s report noted that only six of the 30 companies that were part of the Sensex in 1980 remain in the index today. Financial services and IT, which had no representation in the Sensex in 1980, are now among the dominant sectors in the benchmark.
The example highlights an important feature of index investing: investors are not necessarily locked into the companies or sectors that dominate the market today.
As the economy and market leadership change, index constituents can change as well.
Next 50 and Smallcap 250 offer different exposure
The Nifty Next 50 and Nifty Smallcap 250 can complement each other, but they come with different risk characteristics.
The Next 50 consists of relatively established companies immediately below the Nifty 50. The Smallcap 250 provides exposure to smaller companies, which can offer higher growth opportunities but also greater earnings and price volatility.
Haria said the Next 50 offers relatively greater business maturity and liquidity, while the Smallcap 250 provides exposure to a wider opportunity set with higher volatility and downside risk.
The allocation between the two should therefore depend on an investor’s overall portfolio, investment horizon and risk tolerance.
Does passive investing mean lower risk?
Not necessarily.
A passive fund removes the need to make individual stock-selection decisions, but it continues to carry the risks of the underlying index.
A Smallcap 250 index fund, for example, can be considerably more volatile than a large-cap index fund. Investors therefore need to look beyond past returns and understand the risk associated with the segment they are choosing.
Haria said investors should focus on disciplined asset allocation rather than trying to identify the exact market bottom. Staggered investments or SIPs can help investors deploy money over time, while periodic rebalancing can bring the portfolio back to its intended allocation.
