India’s Passive Fund: Passive mutual funds have grown very fast in India. Before this only big institutions used them. Now normal people also invest in them. Now the passive funds hold about 17-19% of the total mutual fund industry assets. Ten years ago this number stayed below 1%.
In countries like the US and Europe, passive funds already control more than 50–55% of mutual fund assets. India has not reached that level yet, but the trend clearly moves in that direction. Pratik Oswal, Chief of Passive Business at Motilal Oswal AMC explained this change during a CNBC-TV18 discussion.
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He said, “Ten years ago, passives were less than 1% of the entire mutual fund AUM. Today, they are close to 18–19%.” He also shared that earlier most investors were institutions, but after Covid, many retail and HNI investors started investing in passive funds.
Because of this shift, passive funds no longer sit on the sidelines. According to CNBC TV18 Oswal said, “Most investors today are probably looking at having at least one or two passive funds in their equity portfolio.”
Simplicity Attracts more than Low cost
Many people talk about low cost as the biggest benefit of passive funds. These funds charge very low fees compared to active equity funds, which often charge 2–2.5% every year. But experts feel cost is not the only reason people choose passive funds.
Oswal believes simplicity attracts investors more than anything else. He said, “In today’s market, investors are faced with too many choices.” He explained that if someone wants mid-cap exposure, they do not want to pick from 10 or 15 funds. Buying a mid-cap index fund gives quick exposure without confusion.
Aditya Agarwal who is the co-founder of Wealthy.in had agreed with this view. He said investors mostly choose simple options like Nifty 50, Sensex, gold ETFs, and gold index funds. He said, “Passives are meant to be simple products. It’s encouraging that what’s getting adopted are the simplest options.”
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Gold also plays an important role. Gold stands as India’s second-largest asset class after real estate. Agarwal said passive funds work best here because gold prices follow global markets. He clearly stated, “An ETF or a low-cost index fund is the best way to invest in gold.”
Active and Passive Funds
Indian stock markets have changed a lot over the years. Oswal said markets are now more efficient, especially in large-cap stocks. Because of this, active large-cap funds do not beat the market by big margins anymore. He said, “The kind of outperformance we used to see in large-cap funds has become quite muted.” Over the last five years, more money has gone into passive large-cap funds than active ones.
For long-term investors with goals of 15, 20, or 25 years, choosing the right active fund every time can be tough. Oswal said, “If you go passive, it’s likely to be around for the long term.” He gave the example of the S&P 500 in the US to show how simple index investing can build wealth over many years.
Agarwal said active funds still matter in mid-cap, small-cap, and thematic areas. He clearly said, “In mid-cap, small-cap and thematic funds, I remain a firm believer in active management.” He explained that India still has market gaps where good fund managers can earn extra returns.
He added, “Good fund managers can generate 3–5% alpha, and the additional expense is often justified.”
Oswal also shared a similar view. Passive funds work best for large-cap investing, while active funds still add value where research and stock selection play a bigger role.
