Summary of this article
Passive investing in India is growing fast.
Growth is led by corporates and institutions, retail participation stays low.
Despite slower inflows this year, passive funds have strong long-term tailwinds: Report.
India’s mutual fund landscape is experiencing a structural shift towards passive investing, with quarterly average assets under management (QAAUM) share rising to around 17.1 per cent as of Sep’25, vs. 7 per cent for the same quarter in FY20, as shown in a report by Motilal Oswal Financial Services. Over Sep 2021 to Sep 2025, exchange-traded funds (ETFs) and index funds delivered AUM CAGRs of 28 per cent and 81 per cent (vs. total equity at 28 per cent), respectively.
Financial year 2025, in fact, emerged as a breakout year for passive investing, where the net inflows have more than doubled (approx 118 per cent year on year), driven by a 278 per cent and 59 per cent surge in Index and ETF flows, respectively.
“With information deluge in Indian markets, it is almost impossible for any active manager to consistently know more than the market and hence be able to consistently generate alpha,” says Hemen Bhatia, Executive Director & CEO, Angel One Asset Management Company.
Investors, as per Bhatia, have over the years seen the above getting to be reflected in Indian data of active funds versus benchmarks, wherein the majority of actively managed schemes across mutual funds, Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) have failed to consistently outperform the relevant indices.
At Outlook Money, we conducted a quick data study that revealed 80 per cent of actively-managed equity funds failed to outperform their benchmark over the last year.
According to Bhatia of Angel One AMC, these structural challenges of generating alpha, combined with lower cost, transparency, easy digital execution and supportive regulatory developments, have led to the expansion of the passive funds market in India.
Retail participation in passives still stands low
As per the report, while corporates and high net worth individuals (HNIs) are lapping up index funds and ETFs, the share of retail investors still stands low.
Institutional catalysts such as the Employees Provident Fund Organisation (EPFO), allocated nearly 10 per cent of its corpus to ETFs as of March 2024. The allowed limit is 5 per cent to 15 per cent. Whereas, corporates’ share stood at 86 per cent and 37 per cent in ETFs and Index AUM mix, respectively, as of Sep 2025. HNIs, on the other hand, held 12% and 39% allocation in ETFs and index funds AUM, respectively.
At the same time, retail participation remains the missing piece, with a 3 per cent and 23 per cent share in the ETFs and Index AUM mix as of September 2025.
“Retail participation is constrained by low distributor incentives and limited awareness,” says Prayesh Jain, Research Analyst, Motilal Oswal Financial Services. Though digital platforms are beginning to narrow this gap, he adds.
According to Jain, wealth managers like 360ONE and Nuvama are well-placed to benefit, given their sophisticated client bases and direct investment platforms. With the transition towards an advisory model, their reduced product bias and focus on cost efficiency are expected to drive greater adoption and growth of passive funds.
Financial Year 2026 saw moderate inflows in passive funds, YTD
Flows have, however, moderated YTD FY26 (Apr–Oct 2025), with passives down 34 per cent YoY and equity funds lower by 8 per cent. According to Prayesh Jain, the moderate inflows could be due to base effects and rotation toward active categories like flexi-cap and mid-cap funds.
Nonetheless, as per the Report, the long-term outlook for passives remains strong, supported by rising investor comfort with low-cost, benchmark-linked products, expanding offerings, and growing institutional adoption.
