<p>Passive investing, primarily through index funds and exchange-traded funds (ETFs), has gained significant traction in India in recent years. The assets under management (AUM) in passive funds doubled from 8% of the mutual fund industry in August 2020 to 16.7% by March 2025. In fact, it went up from Rs.9.22 lakh crore in March 2024 to Rs.11.13 lakh crore in just one year, a growth of 20.7%. </p>.<p>This surge is driven by factors such as low cost, simplicity and the broad market exposure passive funds offer. Equity ETFs, that track domestic equity indices, command AUM of Rs.6.28 lakh crore, offering low-cost structure and ability to mirror the performance of benchmark indices. Whereas equity index funds which track broad market indices without active management are the second largest category with AUM of Rs.1.57 lakh crore.</p>.<p>Remaining comes from debt ETFs, target maturity index funds and gold/silver ETFs. As of March 2025, there are 614 passive schemes, of which 196 are equity index funds, 177 equity ETFs, 92 target maturity index funds and remaining are gold, silver ETFs and others. </p>.<p>In the Indian market 76 index funds and 41 ETFs were introduced in 2024 alone, which shows growing investor confidence in passive strategies, especially in large-cap segments where active funds have struggled to consistently beat benchmarks.</p>.<p>Active funds are managed by professional fund managers who try to outperform market indices by identifying promising sectors and stocks and timing market movements. Data show that in the 10 months’ post June 2024, 53% of active large-cap equity funds outperformed their index benchmarks, marking an improvement over previous years. Active management’s edge lies in its fund managers’ flexibility to respond to market volatility with their ability to identify growth and value stocks and downsizing positions during falling markets. </p>.<p>Active fund managers mostly reduce exposure to overvalued sectors or stocks or reposition portfolios ahead of policy changes, during market correction, any events, etc., but passive funds cannot take such action. Such adaptability has proved to be valuable during the recent market downturn in the past six months starting September 2024, where active small-cap and flexicap funds outperformed their respective indices. </p>.<p>During recent market downturns, active funds have demonstrated better downside protection in certain segments, such as small-cap equities, while passive funds, especially low-volatility variants, struggled to cushion losses. This suggests that passive funds may not always provide the expected risk mitigation in turbulent times. Indian stock market in 2025 is characterised by volatility driven by geopolitical tensions, tariffs war, delay in rate cuts, etc. In such conditions active fund manager’s prudence helps in capitalising on short-term opportunities and avoiding risks. However, passive funds benefit from the overall growth trajectory of the Indian economy, providing broad exposure that captures market gains without the risk of manager underperformance.</p>.<p><span class="italic">(The author is Vice President at Bonanza Portfolio Ltd)</span></p>
<p>Passive investing, primarily through index funds and exchange-traded funds (ETFs), has gained significant traction in India in recent years. The assets under management (AUM) in passive funds doubled from 8% of the mutual fund industry in August 2020 to 16.7% by March 2025. In fact, it went up from Rs.9.22 lakh crore in March 2024 to Rs.11.13 lakh crore in just one year, a growth of 20.7%. </p>.<p>This surge is driven by factors such as low cost, simplicity and the broad market exposure passive funds offer. Equity ETFs, that track domestic equity indices, command AUM of Rs.6.28 lakh crore, offering low-cost structure and ability to mirror the performance of benchmark indices. Whereas equity index funds which track broad market indices without active management are the second largest category with AUM of Rs.1.57 lakh crore.</p>.<p>Remaining comes from debt ETFs, target maturity index funds and gold/silver ETFs. As of March 2025, there are 614 passive schemes, of which 196 are equity index funds, 177 equity ETFs, 92 target maturity index funds and remaining are gold, silver ETFs and others. </p>.<p>In the Indian market 76 index funds and 41 ETFs were introduced in 2024 alone, which shows growing investor confidence in passive strategies, especially in large-cap segments where active funds have struggled to consistently beat benchmarks.</p>.<p>Active funds are managed by professional fund managers who try to outperform market indices by identifying promising sectors and stocks and timing market movements. Data show that in the 10 months’ post June 2024, 53% of active large-cap equity funds outperformed their index benchmarks, marking an improvement over previous years. Active management’s edge lies in its fund managers’ flexibility to respond to market volatility with their ability to identify growth and value stocks and downsizing positions during falling markets. </p>.<p>Active fund managers mostly reduce exposure to overvalued sectors or stocks or reposition portfolios ahead of policy changes, during market correction, any events, etc., but passive funds cannot take such action. Such adaptability has proved to be valuable during the recent market downturn in the past six months starting September 2024, where active small-cap and flexicap funds outperformed their respective indices. </p>.<p>During recent market downturns, active funds have demonstrated better downside protection in certain segments, such as small-cap equities, while passive funds, especially low-volatility variants, struggled to cushion losses. This suggests that passive funds may not always provide the expected risk mitigation in turbulent times. Indian stock market in 2025 is characterised by volatility driven by geopolitical tensions, tariffs war, delay in rate cuts, etc. In such conditions active fund manager’s prudence helps in capitalising on short-term opportunities and avoiding risks. However, passive funds benefit from the overall growth trajectory of the Indian economy, providing broad exposure that captures market gains without the risk of manager underperformance.</p>.<p><span class="italic">(The author is Vice President at Bonanza Portfolio Ltd)</span></p>