Passive investing wave in India

The passive investing wave in India describes the structural shift since approximately 2018 in which index-tracking mutual fund schemes (comprising exchange-traded funds (ETFs), index funds, and fund-of-funds investing in ETFs) grew from a marginal segment to a substantial component of industry AUM, with passive-fund AUM crossing approximately Rs 12 lakh crore by April 2026 (approximately 17 per cent of total industry AUM). The wave is among the most consequential structural shifts in the Indian mutual fund industry of the post-2017 era, comparable in importance to the direct plan adoption trajectory and the SIP growth story , and is widely understood to be both a structural feature of mature equity markets and a specific Indian post-2017 phenomenon.

The Indian passive wave is driven by a convergence of factors. The most consequential institutional driver has been the Employees’ Provident Fund Organisation (EPFO)’s decision in August 2015 to allocate a portion of its incremental corpus to equity ETFs (initially 5 per cent, raised to 15 per cent by 2017), creating a large, predictable, and price-insensitive institutional demand for Nifty 50 and Sensex ETFs. The most consequential retail driver has been the cumulative evidence from the SPIVA (S&P Index Versus Active) India scorecards that approximately 60 to 70 per cent of Indian large-cap active funds underperformed their benchmarks over rolling 5-year periods, undermining the longstanding “alpha-rich market” narrative. The most consequential regulatory driver has been the MF Lite framework introduced in 2024, which substantially lowered the entry barrier for passive-only AMCs by reducing the minimum sponsor and AMC net-worth requirements.

The wave’s commercial expression has been the launch of an extensive index-fund and ETF product range across large-cap, mid-cap, small-cap, sector, thematic, international, and debt categories. By 2026, virtually every major SEBI-defined scheme category has at least one widely-held passive product, with the Nifty 50, Nifty Next 50, Nifty 500, Nifty Bank, Sensex, S&P 500, Nasdaq 100, and Bharat Bond series among the most-held passive products. Direct-plan distribution platforms (Groww , Kuvera , ET Money , INDmoney , Zerodha Coin ) have been particular accelerants, with passive funds disproportionately represented in their AUM mix relative to the broader industry.

Definitions

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. The market price typically tracks within a narrow arbitrage band of the intraday indicative NAV (iNAV).
• 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, making them more accessible for retail investors using the SoA-format channel.
• 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. International-equity FoFs are the principal category.

All three product types share the objective of replicating a specified benchmark rather than outperforming it. Their Total Expense Ratios (TERs) are substantially lower than active funds: typical direct-plan index-fund TERs are 0.10 to 0.30 per cent versus 0.80 to 1.25 per cent for active equity funds. The TER differential, compounded over multi-decade horizons, is the principal mathematical driver of the passive proposition.

Historical context

Pre-2002 absence

Before 2002, India had no domestic ETF or index fund. Passive investing was not part of the Indian mutual fund landscape; the industry was structured entirely around active management.

Benchmark Mutual Fund and Nifty BeES, January 2002

India’s first ETF was Nifty BeES (Nifty Benchmark Exchange-Traded Scheme), launched by Benchmark Mutual Fund in January 2002. It was the first ETF in Asia outside Japan. Benchmark Mutual Fund pioneered the Indian passive space and was subsequently acquired by Goldman Sachs Asset Management in 2011, and then by Reliance Mutual Fund (now Nippon India Mutual Fund) in 2015. The Nifty BeES product (now Nippon India ETF Nifty BeES) remains one of the largest ETFs in India by AUM.

Gold ETFs, 2007

The introduction of Gold ETFs in 2007 expanded the passive category beyond equity. Gold ETFs provided physical-gold-backed exposure without the security and storage costs of physical gold ownership, with the price tracking the underlying gold price net of expense ratio.

The 2000s and early 2010s: marginal segment

Throughout the 2000s and early 2010s, passive funds remained a small fraction of industry AUM. The dominant Indian narrative was that India was an “alpha-rich market” where skilled active managers could consistently generate returns above the benchmark. This narrative was supported by:

• The 2003 to 2008 bull market during which several large-cap and diversified active funds outperformed.
• The relatively limited cross-section of retail investors with the financial literacy to engage with the passive-versus-active comparison.
• The distribution-channel incentives (trail commission on active funds, no such commission on passive funds) that biased advisory and distributor recommendations toward active.

By March 2018, passive funds (ETFs, index funds, FoFs) totalled approximately Rs 1.5 lakh crore, approximately 7 per cent of industry AUM.

EPFO’s entry, August 2015

The most consequential institutional catalyst for passive investing was the Employees’ Provident Fund Organisation (EPFO)’s decision in August 2015 to allocate 5 per cent of its incremental corpus to equity ETFs (treated at the EPFO equity ETF channel reference). The allocation was subsequently raised to 15 per cent by 2017. EPFO’s mandate was restricted to ETFs tracking the Nifty 50 and Sensex , creating a large, captive, price-insensitive demand for these two specific ETFs. By 2026, EPFO’s cumulative equity ETF investment exceeded Rs 3 lakh crore, making EPFO by far the largest single investor in Indian equity ETFs and the principal demand-side driver of large-cap ETF AUM growth.

The active versus passive debate

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 to 2024 reports:

For mid-cap and small-cap active funds, the underperformance rates were lower (40 to 55 per cent over 5 years), partially justifying active management in these categories.

The SPIVA data, widely cited by financial media, RIAs, and digital platforms, 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. The SPIVA scorecards have become a structural input into the post-2018 retail-investor education on passive investing. The detailed comparative treatment is at the active versus passive equity in India reference.

SEBI 2017 categorisation impact

The SEBI scheme rationalisation circular of October 2017 had an unintended consequence for active large-cap funds. By defining the large-cap universe as the top 100 stocks by market capitalisation and requiring large-cap funds to hold at least 80 per cent 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 direct comparison with the Nifty 100 index. This structural constraint accelerated the case for passive investing in the large-cap space, with subsequent SPIVA data showing widening underperformance among large-cap active funds.

Investor behavioural shift

The post-2018 retail investor cohort, particularly the post-2020 first-time investors onboarded through digital platforms, has shown a structural preference for passive investing relative to prior cohorts:

• Higher financial literacy and exposure to international-market data.
• Reduced trust in traditional distribution-channel advice.
• Cost-consciousness driven by the awareness of compounding implications.
• Behavioural simplicity of the “own the market” proposition.

The convergence of SPIVA data, the post-2017 categorisation effect, and the behavioural shift of post-2020 retail investors has produced the demand-side driver of the post-2018 passive wave.

AUM trajectory

The growth pattern shows:

• A pre-2018 baseline of approximately 7 per cent.
• Steady growth through 2019, with the COVID-19 dislocation producing a temporary 2020 dip.
• An acceleration in 2020 to 2022 driven by the post-COVID retail surge and digital-platform onboarding.
• Continued growth through 2023 to 2026, with the share oscillating around 16 to 17 per cent.

The 16 to 17 per cent share by 2026 places India behind developed markets (where passive share frequently exceeds 50 per cent of equity AUM) but ahead of most peer emerging markets. The structural trajectory points to continued passive share growth through the late 2020s.

Product categories

Nifty 50 and Sensex products

The most widely held passive products. Examples:

• Nippon India ETF Nifty BeES (the original 2002 ETF).
• Nippon India Index Fund - Nifty 50 Plan.
• UTI Nifty 50 Index Fund.
• HDFC Index Fund - Nifty 50 Plan.
• SBI ETF Nifty 50.

Direct-plan TERs are typically 0.10 to 0.20 per cent. Liquidity is high (especially for the ETF format), and tracking error is low (typically under 10 basis points annually). These products are the institutional and retail mainstay of large-cap passive investing.

Nifty Next 50

Tracking the Nifty Next 50 (the 51st to 100th ranked stocks by market cap), this category provides exposure to the broader large-cap universe excluding the Nifty 50 constituents. Notable products include Nippon India ETF Nifty Next 50 and several index funds.

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 in the underlying constituents.
• Higher index turnover (additions and removals).
• Higher impact costs on fund-level transactions.

The detailed treatment is at the tracking error of index funds and tracking difference of index funds references.

Sector and thematic ETFs

Sector ETFs covering banking (Nifty Bank , Nifty Financial Services), IT, pharma, consumption, energy, infrastructure, 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. The thematic ETF category has been the subject of periodic SEBI consultation on whether the proliferation of narrowly-defined themes is consistent with the broader passive-investment thesis.

International index fund FoFs

Fund-of-funds offering exposure to international indices, particularly the S&P 500 and Nasdaq 100, gained popularity from 2020 onwards. The principal Indian-listed FoFs:

• Motilal Oswal Nasdaq 100 FoF.
• Nippon India Nifty 50 FoF (domestic, not international).
• Various S&P 500 and global-equity FoFs across multiple AMCs.

SEBI imposed an aggregate overseas-investment limit on industry-wide foreign-equity AUM under the SEBI mutual-fund overseas investment cap , causing temporary subscription stops on several international FoFs in 2022 and 2023 as the limits were reached. The cap has been progressively renegotiated but remains a structural constraint.

Debt index funds and ETFs

The Bharat Bond ETF series, 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 that gives investors a predictable maturity-date payout). The Bharat Bond ETF series raised approximately Rs 55,000 crore across its tranches by 2024, becoming the largest debt-ETF category in India. Subsequent debt-ETF launches have addressed corporate-bond and gilt themes.

Smart-beta and factor ETFs

Smart-beta ETFs, which track factor-based indices (value, quality, momentum, low-volatility), began entering the Indian market from 2020 onwards. These products are technically passive (rule-based) but apply factor-based screening to the underlying universe, sitting between pure-passive and active management. The category remains small relative to broad-index ETFs.

Direct-plan platform integration

The direct-plan distribution platforms have been particular accelerants of the passive wave:

• Zerodha Coin : The demat-format model makes ETFs directly accessible alongside the broker’s equity platform; ETF holdings appear in the same demat account as equity holdings.
• Groww : Integrated index-fund and ETF subscription in the SoA and demat formats respectively. Particularly active in promoting passive funds to first-time investors.
• Kuvera and ET Money : Strong educational content on the passive-versus-active comparison; goal-based planning that defaults to index-fund recommendations for new investors.
• INDmoney : Aggregation framework that integrates international-equity ETF holdings (via the LRS route) with domestic index-fund holdings.

Passive funds account for a disproportionate share of these platforms’ AUM relative to the broader industry. Industry analysts estimate that direct-plan distribution platforms have between 25 and 35 per cent of their MF AUM in passive funds, versus the industry-wide 17 per cent share.

MF Lite framework, 2024

The SEBI MF Lite framework , notified in October 2024, lowered the entry barrier for passive-only AMCs. Principal features:

• Reduced net-worth requirements: AMC minimum net worth of Rs 35 crore (versus Rs 50 crore for full-stack AMCs).
• Simplified compliance: Reduced operational compliance burden in recognition of the lower investment-management risk.
• Passive-only mandate: Restricted to index funds, ETFs, FoFs of overseas ETFs, and similar passive products.

By April 2026, three MF Lite AMCs had received in-principle approval, with the launch of new passive-only schemes underway. The framework is expected to accelerate the passive-fund product proliferation and reduce passive-fund TERs through additional competition.

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 of 60 to 100 basis points versus direct-plan active funds.
2. Behavioural simplicity: The passive 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 equity component is also index-linked. Combined EPFO and NPS institutional flows provide a predictable demand base.
4. Global trend alignment: India’s passive wave is aligned with the global shift toward passive management, validated by decades of developed-market evidence.
5. MF Lite framework: The 2024 regulatory innovation provides structural support for passive-only AMCs and product proliferation.
6. Post-2020 retail investor cohort: The data-literate online-platform investor cohort prefers passive structures.
7. Distribution-platform incentives: Direct-plan distribution platforms have economics aligned with high-volume low-friction passive products rather than commissioned active products.

Arguments for active management

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

• Information asymmetry: India’s information asymmetry between institutional and retail investors is higher than in developed markets, creating sustainable alpha opportunities.
• Index construction issues: Indian indices have higher constituent turnover than developed-market peers; companies that exit indices can produce drag on passive holdings.
• Liquidity constraints in small-cap: Small-cap index tracking is challenging due to underlying liquidity; many index constituents are illiquid, causing tracking error and execution slippage in passive small-cap funds.
• Behavioural-finance role of advisers: Active management’s value extends beyond the investment-return dimension; the adviser’s role in keeping investors invested during drawdowns has measurable economic value.
• Concentration of index returns: The Indian indices have produced returns concentrated in a small number of large constituents; active managers may avoid index-weight overconcentration risk.

These arguments are not invalidated by the SPIVA data; they qualify rather than rebut it. The post-2018 industry consensus appears to be a balanced view: passive investing is structurally favoured for large-cap exposure, with active management continuing to have a role in mid-cap, small-cap, sectoral, and behavioural-coaching contexts.

Tax treatment of passive funds

Passive funds are taxed as their underlying asset class:

The detailed tax framework is at the capital gains tax in India reference. The 2023 debt MF taxation reform eliminated the LTCG benefit for debt-oriented passive products.

Recent developments

MF Lite framework operationalisation

The October 2024 MF Lite framework has produced three in-principle approvals for passive-only AMCs by April 2026, with first scheme launches underway. The framework is expected to accelerate product proliferation through 2026 and 2027.

Overseas investment cap

The USD 7 billion aggregate overseas investment cap and the USD 1 billion ETF-specific cap have been periodic constraints on international-equity passive products. SEBI has periodically permitted incremental cap increases but has not adopted a structural framework for automatic cap growth in line with industry AUM.

Smart-beta and factor ETF growth

The post-2024 smart-beta and factor ETF category has grown moderately, with launches across value, quality, momentum, and low-volatility themes. The category remains a small fraction of total passive AUM but has been a growing proportion of new-launch activity.

Real-time NAV consultation impact

SEBI’s October 2024 consultation on real-time NAV publication for equity and hybrid schemes, if adopted, would interact with the existing iNAV framework for ETFs by potentially making the iNAV-style real-time disclosure applicable across all equity schemes. The implementation details remain under industry consultation.

Investor-education campaign integration

The Mutual Funds Sahi Hai campaign and the SEBI Investor Charter for Mutual Funds framework have been progressively integrated with passive-investing education content. Passive funds are increasingly featured in entry-level investor-education materials as the default category for first-time investors.

Direct-plan platform passive emphasis

The direct-plan distribution platforms have continued to emphasise passive funds in their onboarding flows and goal-based planning tools through 2024 to 2026, reflecting both the platform-economics alignment and the investor-suitability argument.

Criticism and policy debates

Concentration risk in passive funds

The cumulative weight of EPFO, NPS, and retail-investor flows into Nifty 50 and Sensex ETFs has produced concentration risk in the underlying large-cap stocks. A small number of large-cap constituents account for an increasing share of cumulative equity flows. SEBI commentary has periodically noted this concentration as a structural feature requiring monitoring.

Index-construction methodologies

The post-2017 SEBI categorisation framework anchors large-cap, mid-cap, and small-cap definitions to the AMFI semi-annual cap list but does not prescribe index-construction methodologies. The differences between Nifty and BSE index methodologies, and between domestic and international indices, can produce material divergence in passive-fund outcomes.

Passive-fund stress-testing

The 2024 stress testing framework for mid-cap and small-cap active schemes does not directly apply to passive funds. Industry commentary has periodically suggested that passive funds in mid- and small-cap categories should also be subject to liquidity-stress disclosure.

Index-rebalancing market impact

Periodic Nifty and Sensex rebalancing produces predictable trading pressure on incoming and outgoing constituents. The cumulative scale of passive AUM means that rebalancing events now produce measurable market-impact, with stocks added to the index typically rising and stocks removed typically falling around the rebalancing date.

Smart-beta methodology opacity

Some smart-beta ETFs use rules-based methodologies that are insufficiently transparent for retail investors. The boundary between rules-based passive and quasi-active management is contested.

See also

• Mutual fund
• Mutual fund industry in India
• Active versus passive equity in India
• Direct plan adoption in India
• SIP growth story in India
• EPFO and the equity ETF channel
• MF Lite framework and passive-only AMCs
• SEBI Mutual Fund Lite framework
• Pension fund overlap with MFs
• SEBI scheme rationalisation circular 2017
• SEBI mutual-fund overseas investment cap
• SEBI mutual-fund stress-testing framework 2024
• Tracking error of index funds
• Tracking difference of index funds
• Nifty 50
• Sensex
• Total Expense Ratio (TER)
• Mutual fund riskometer
• SEBI scheme rationalisation circular 2017
• AMFI
• Mutual Funds Sahi Hai
• SEBI Investor Charter for Mutual Funds
• Capital gains tax in India
• Section 112A
• Section 111A
• SEBI debt mutual fund tax 2023
• Groww
• Kuvera
• ET Money
• INDmoney
• Zerodha Coin
• Mutual fund consolidated account statement (CAS)
• AMFI T30 and B30 cities

References

1. AMFI Industry Data, monthly AUM disclosures, Association of Mutual Funds in India, 2018 to 2026.
2. S&P Dow Jones Indices SPIVA India Scorecards, bi-annual publications, 2014 to 2025.
3. EPFO Equity ETF Investment Reports, Employees’ Provident Fund Organisation, 2015 to 2026.
4. SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, 6 October 2017, Categorisation and Rationalisation of Mutual Fund Schemes.
5. SEBI MF Lite Framework Circular, October 2024.
6. SEBI Master Circular on Mutual Funds, SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.
7. Finance Act, 2023, Section 50AA insertion for specified mutual funds.
8. Finance (No. 2) Act, 2024, Sections 51 and 56 (capital gains tax regime).
9. NSE Indices Limited, Nifty 50, Nifty Next 50, Nifty Midcap 150, Nifty Smallcap 250 Index Methodology.
10. AMFI Industry Composition Snapshot, April 2026.