Passive Investing on WebNotes

Active equity vs passive equity investing in India

Tue, 12 May 2026 00:00:00 +0000

The active-versus-passive debate in Indian equity investing examines whether actively managed equity mutual funds, where a fund manager selects stocks based on research and conviction, consistently deliver higher risk-adjusted returns than passively managed funds that simply replicate a market index at lower cost.

This article presents the empirical evidence, cost analysis, and structural arguments advanced for each approach in the Indian market context as of 2024.

Definitions

Active equity fund: A fund where a fund manager and research team construct a portfolio of stocks based on fundamental analysis, valuation, sector views, and risk assessments. The fund’s benchmark (e.g., Nifty 50 TRI, Nifty 500 TRI) serves as the reference; the manager aims to generate alpha (return above the benchmark). Cost is higher due to research staff, portfolio management fees, and higher transaction turnover.

EPFO and the Equity ETF Channel

Tue, 12 May 2026 00:00:00 +0000

The Employees’ Provident Fund Organisation (EPFO) equity ETF channel refers to the mechanism through which India’s largest provident fund – which manages the retirement savings of approximately 6.5 crore contributing members – allocates a portion of its incremental corpus to equity exchange-traded funds (ETFs). The EPFO’s entry into equity markets in 2015 created the largest single captive institutional demand for Indian equity ETFs, directly contributing to the passive investing wave and making the EPFO one of the most consequential investors in Indian capital markets.

Equity ETF in India

Tue, 12 May 2026 00:00:00 +0000

An equity exchange-traded fund (equity ETF) in India is a passively managed open-ended fund that tracks a specific equity index (such as the NIFTY 50, SENSEX, NIFTY Bank, or NIFTY Midcap 150), with its units listed and traded continuously on a stock exchange (NSE or BSE) during market hours. Unlike a conventional open-ended mutual fund (in which units are purchased and redeemed at the end-of-day NAV), equity ETF units trade intraday on the exchange at market prices that approximate the fund’s NAV, enabling real-time entry and exit.

How to invest in an index fund via Coin

Tue, 12 May 2026 00:00:00 +0000

An index fund is an open-ended mutual fund scheme that passively replicates the composition and weightings of a market index, such as the Nifty 50, Nifty Next 50, Sensex, or Nifty Midcap 150. The fund manager’s objective is not to outperform the index but to minimise the difference between the fund’s returns and the index’s returns (tracking error). Index funds are low-cost, transparent, and tax-efficient relative to actively managed funds.

Large-cap fund vs index fund in India

Tue, 12 May 2026 00:00:00 +0000

SEBI’s October 2017 categorisation circular mandated that large-cap equity mutual funds invest at least 80% of total assets in equity of large-cap companies, defined as the top 100 companies by full market capitalisation listed on NSE/BSE as per AMFI’s semi-annual ranking. Index funds tracking the Nifty 50 or Sensex invest in the same broad universe (top 50 or top 30 companies by market cap) but use a passive, rules-based replication strategy with no active stock selection.

Nifty BeES, India's first exchange-traded fund (2001)

Tue, 12 May 2026 00:00:00 +0000

Nifty BeES (Nifty Benchmark Exchange-Traded Scheme), launched on 28 December 2001 by Benchmark Mutual Fund on the National Stock Exchange of India, was the first exchange-traded fund in India and the first equity-index ETF in Asia. It tracked the Nifty 50 index, with each unit representing one-tenth of the Nifty 50 index value, and was listed and continuously traded on the NSE during market hours at prices close to its net asset value. The launch of Nifty BeES preceded any mainland Chinese or Japanese equity ETF and inaugurated passive index investing as a viable instrument for Indian retail, institutional, and provident fund investors.

Passive Investing Wave in India (Post-2018)

Tue, 12 May 2026 00:00:00 +0000

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.

Tracking difference in index funds

Tue, 12 May 2026 00:00:00 +0000

Tracking difference is the cumulative return of an index fund’s benchmark minus the fund’s cumulative return over a specified period, expressed in percentage points. Unlike tracking error (the standard deviation of periodic return differences), tracking difference is a single signed number that directly measures the magnitude of the fund’s under- or over-performance relative to its benchmark over the full measurement period.

Tracking difference is arguably the more investor-relevant metric for cost comparison among passive funds: it shows the actual wealth impact of owning the fund relative to the benchmark, not just the volatility of daily deviations.

Tracking error in index funds

Tue, 12 May 2026 00:00:00 +0000

Tracking error is the annualised standard deviation of the difference between a mutual fund’s periodic returns and the returns of its benchmark index over the same period. It is the primary metric for evaluating how accurately an index fund or exchange-traded fund (ETF) replicates its target benchmark. A tracking error of zero would imply perfect replication, in practice, every fund has some non-zero tracking error driven by costs, cash drag, and rebalancing lags.

UTI Master Index Fund (1998), India's first index fund

Tue, 12 May 2026 00:00:00 +0000

UTI Master Index Fund, launched in 1998 by the Unit Trust of India, was India’s first passive index-tracking mutual fund. Structured as an open-end scheme that replicated the composition of the BSE Sensex (the Bombay Stock Exchange’s benchmark 30-stock index), the fund offered investors proportionate exposure to India’s large-cap equity market at lower cost than active equity funds, without relying on a fund manager’s stock-selection decisions. Its launch predated the Nifty BeES ETF of December 2001 by approximately three years, making it the foundational product in the history of passive investing in India.

Zerodha Fund House

Mon, 11 May 2026 00:00:00 +0000

Zerodha Fund House is the registered mutual fund brand (the name of the SEBI-registered mutual fund trust) operated by Zerodha AMC Private Limited, a member of the Zerodha group of financial services companies. Launched in 2023, Zerodha Fund House offers a range of passive index funds and debt schemes, distributed primarily through Zerodha’s own Coin platform and the major mutual fund exchange platforms.

The brand name distinguishes the investor-facing mutual fund trust from its asset management company. In Indian regulatory terminology, the AMC manages funds on behalf of the trust, and investors purchase units in the trust’s schemes. Zerodha Fund House is thus the name under which scheme information documents, key information memoranda, and unit confirmations are issued.