Passive Investing Wave in India (Post-2018)

The passive investing wave in India describes the structural shift that occurred after 2018 in which index-tracking mutual fund schemes – comprising exchange-traded funds (ETFs) and index funds – grew from a marginal segment to one commanding Rs 11 lakh crore in assets under management by March 2025. The wave was driven by a convergence of factors: growing evidence that most actively managed large-cap funds underperformed benchmark indices over rolling periods, EPFO’s large and predictable equity ETF mandates, the entry of low-cost digital investment platforms, and SEBI’s MF Lite framework that lowered the entry barrier for passive-only AMCs.

Defining passive funds

In the Indian regulatory context, passive funds include:

• Exchange-traded funds (ETFs): Open-ended funds that track an index and are listed and traded on a stock exchange (NSE or BSE). Investors buy and sell ETF units at market prices during trading hours.
• Index funds: Open-ended funds that replicate an index but transact at end-of-day NAV like conventional mutual funds. They do not require a demat account.
• Fund of funds (FoFs) investing in ETFs: FOFs that invest in one or more ETFs, providing NAV-based access to ETF returns for investors without demat accounts.

Both ETFs and index funds are defined by their objective of replicating a specified benchmark rather than outperforming it. Their expense ratios are substantially lower than active funds.

Historical context (pre-2018)

Early ETF launches

India’s first ETF was Benchmark Mutual Fund’s Nifty BeES (Nifty Benchmark Exchange-Traded Scheme), launched in January 2002 – the first ETF in Asia outside Japan. Benchmark Mutual Fund, subsequently acquired by Goldman Sachs Asset Management and later by Reliance Mutual Fund (now Nippon India), pioneered the Indian passive space. Gold ETFs were introduced in 2007.

Throughout the 2000s and early 2010s, passive funds remained a fraction of industry AUM. The dominant narrative was that India was an “alpha-rich” market where skilled active managers could consistently generate returns above the benchmark. This narrative was partly supported by the performance of several large-cap and diversified funds during the 2003-2008 bull market.

EPFO’s entry (2015)

The most significant institutional catalyst for passive investing was the Employees’ Provident Fund Organisation (EPFO)’s decision in August 2015 to allocate 5% of its incremental corpus to equity ETFs, subsequently raised to 15% by 2017. EPFO’s mandate was restricted to ETFs tracking the Nifty 50 and Sensex. This created a large, captive, price-insensitive demand for Nifty 50 and Sensex ETFs – particularly Nippon India ETF Nifty BeES and SBI ETF Nifty 50. By 2025, EPFO’s cumulative equity ETF investment exceeded Rs 2.5 lakh crore, making it the largest single investor in Indian equity ETFs.

The active vs passive performance debate (2018 to present)

SPIVA India scorecards

S&P Dow Jones Indices’ SPIVA India (S&P Index Versus Active) reports, published bi-annually since 2014, provided the most systematic dataset on active fund performance relative to benchmarks. Key findings from the 2018-2024 reports:

• Over a 5-year rolling period, approximately 60-70% of Indian large-cap active funds underperformed the BSE 100 or Nifty 100 index.
• Over a 10-year period, the underperformance rate increased to 75-80%.
• Mid-cap and small-cap active funds showed better benchmark-relative performance over 5-10 year periods, partially justifying active management fees in these categories.

The SPIVA data, widely cited by financial media and RIAs, challenged the alpha-rich narrative and created a growing cohort of investors – particularly the data-literate, online-platform demographic – who preferred index funds on a cost and evidence basis.

SEBI’s categorisation consequences

The SEBI scheme rationalisation of 2017 had an unintended consequence for active large-cap funds: by defining the large-cap universe as the top 100 companies by market capitalisation, and requiring large-cap funds to hold at least 80% in these stocks, SEBI reduced the ability of active large-cap managers to generate alpha through small-cap and mid-cap inclusions. The large-cap fund category, now closely constrained to a defined universe, became more susceptible to index comparison, accelerating the argument for passive investing in the large-cap space.

AUM growth trajectory

Source: AMFI monthly data (approximate).

Key product categories

Nifty 50 and Sensex index funds

The most widely held passive products. Low expense ratios (0.10-0.20% for direct plans) and high liquidity make them suitable for long-term equity allocation. Nippon India Index Fund, UTI Nifty 50 Index Fund, and HDFC Index Fund are the largest by AUM in this category.

Mid-cap and small-cap index funds

Nifty Midcap 150 and Nifty Smallcap 250 index funds emerged as popular products from 2021 onwards, as retail investors sought passive exposure to the mid and small-cap rallies without paying active management fees. These funds have higher tracking error than large-cap index funds due to liquidity constraints.

Sector and thematic ETFs

Sector ETFs covering banking (Nifty Bank, Nifty Financial Services), IT, pharma, consumption, and PSU themes proliferated from 2019 onwards. While technically passive (they track defined indices), thematic ETFs require active category selection by the investor, blurring the conceptual line between passive and thematic investing.

International index fund FoFs

Fund-of-funds offering exposure to international indices – particularly the S&P 500, NASDAQ 100, and various global indices – gained popularity from 2020 onwards. SEBI imposed overseas investment limits on industry-wide foreign equity AUM, causing temporary subscription stops on several international FoFs in 2022-23 as limits were reached.

Debt index funds

Nifty Bharat Bond ETFs, managed by Edelweiss AMC and introduced in 2019, were the first passive products in Indian fixed income. They invest exclusively in AAA-rated PSU bonds maturing in specific target years (a defined maturity structure). The Bharat Bond ETF series raised approximately Rs 55,000 crore across its tranches by 2024.

MF Lite framework and new passive-only AMCs

SEBI’s MF Lite framework, introduced in 2021 and operationalised in 2024-25, lowered the minimum net worth requirement for AMC registration from Rs 50 crore to Rs 35 crore for passive-only AMCs. This enabled smaller, specialised entities to enter the passive space. New entrants focus exclusively on index products, with simple operational models and technology-first distribution.

Factors supporting continued passive growth

1. Compressing active fund expense ratios. SEBI’s TER regulations compress active fund fees as AUM grows, narrowing the cost advantage of passive. However, direct plan passive funds still offer a material cost differential.
2. Behavioural simplicity. The passive investment proposition (“own the market, not a manager”) is simpler to communicate to first-generation investors than active fund manager selection.
3. EPFO and NPS flows. The National Pension System (NPS) equity component is also index-linked. Combined EPFO and NPS flows provide a predictable institutional base.
4. Global trend alignment. India’s passive wave is aligned with the global shift towards passive management, validated by decades of developed-market evidence.

Arguments for active management

Active management advocates, particularly in the mid-cap and small-cap categories, argue:

• India’s information asymmetry – between institutional and retail investors – is higher than in developed markets, creating sustainable alpha opportunities.
• Index construction in India includes survivorship bias; companies that exit the index may have large negative impacts on an unmanaged portfolio.
• Small-cap index tracking is challenging due to liquidity; many index constituents are illiquid, causing tracking error and execution slippage.

See also

• Mutual fund
• History of mutual funds in India
• Mutual fund AUM growth in India
• EPFO and the equity ETF channel
• MF Lite framework and passive-only AMCs
• Pension fund overlap with MFs
• AMFI
• SEBI