Something big is happening quietly in Indian investing. Money is steadily moving from actively managed funds (where a manager picks stocks to try to beat the market) into passive funds (which simply copy an index like the Nifty 50). It is not a fad; it is a structural shift, and the numbers are striking. This guide explains what is driving the passive boom, what the data actually shows, and how to think about active versus passive for your own money.
No fund is recommended here. The goal is to help you understand a trend you will keep hearing about, so you can decide what fits you.
The numbers (2026)
Passive funds (index funds + ETFs) in India crossed Rs 14.77 lakh crore in AUM by May 2026 - about 18% of total mutual fund assets, up from just 3% in FY17. Passive funds have not had a single net-outflow month in the last twelve months. For comparison, in the US passive funds are roughly 50% of industry assets, so India's shift may still have a long way to run.
Active vs passive: what is the difference?
An actively managed fund has a fund manager and a research team trying to beat a benchmark index by picking the 'right' stocks at the 'right' time. You pay more (higher expense ratio) for that effort.
A passive fund does not try to beat anything. It simply mirrors an index - a Nifty 50 index fund holds the same 50 stocks in the same weights as the Nifty 50. No stock-picking, minimal decisions, and because of that, a much lower expense ratio.
- Active fund: manager tries to beat the market. Higher cost (often 0.5-1.5% direct). Outcome depends on the manager's skill and luck.
- Passive fund: copies the market. Very low cost (often 0.05-0.30% direct). You get the index return minus a tiny cost.
Why is passive booming? The SPIVA reality
The single biggest driver is uncomfortable data. SPIVA (S&P Indices Versus Active) tracks how Indian active funds perform against their benchmarks. The findings, year after year:
- Over the 10 years ending December 2025, about 73% of large-cap active funds underperformed their benchmark.
- Over the same period, roughly 82% of mid- and small-cap active funds underperformed their benchmark.
- Most active funds, in most categories, trailed the simple index over the long run.
Read that again: roughly 7 out of 10 'expert-managed' large-cap funds did worse than a cheap index fund over 10 years - and that is before fully accounting for the extra fees you paid. Once investors saw this, the logic of paying more for active large-cap management became hard to defend.
It is not always one-sided
Active management is not dead. In 2025, active mid- and small-cap funds actually had a majority outperformance year - their best relative result since 2014. Active can add value in less-efficient corners of the market. But over long periods and especially in large-cap, the index has been very hard to beat after costs.
Why large-cap is the toughest for active managers
Large-cap is the most 'efficient' part of the market. The top 100 companies are tracked by every analyst in the country; there is little secret information left to exploit. So an active large-cap manager is trying to out-smart a crowd that already knows everything, while charging a higher fee. That combination is why index funds have been especially hard to beat in large-cap, and why most new passive money flows there.
The cost angle (small numbers, big difference)
Cost is the one factor that is guaranteed to come out of your returns, every single year. Over decades, even a 1% difference compounds into a large gap.
| Fund type | Typical TER (direct) | Rs 10,000/month for 25 yrs at 12% gross |
|---|---|---|
| Nifty 50 index fund | 0.10-0.20% | ≈ Rs 1.85 crore |
| Active large-cap fund | 1.0-1.5% | ≈ Rs 1.55 crore |
Roughly Rs 30 lakh difference, on the same SIP, just from cost - and this assumes the active fund even matches the index, which most do not over 10+ years. That is the entire passive argument in one table.
Types of passive funds in India
- Index funds: mutual funds that track an index (Nifty 50, Nifty Next 50, Nifty 500, Sensex). Bought like any mutual fund, SIP-friendly, no demat needed.
- ETFs (Exchange Traded Funds): track an index but trade on the stock exchange at live prices. Need a demat account; often slightly lower cost.
- Fund of Funds (FoF): invest in other funds/ETFs, commonly used for international exposure (e.g. a US Nasdaq-100 FoF).
- Newer hybrids: in March 2026, Edelweiss launched India's first passive hybrid index fund, which mechanically holds about 70% in a LargeMidcap equity index and 30% in government bonds - passive investing extended to a balanced structure.
When does active still make sense?
Passive is not automatically right for everything. Active management can still earn its fee in specific situations:
- Less-efficient segments: mid-cap, small-cap and certain thematic areas, where genuine research can still find mispriced stocks (though even here, picking the winning active fund in advance is hard).
- Debt funds: active management of duration and credit can add value; pure indexing is less dominant here.
- Specific goals: some investors deliberately want a manager's judgement and are comfortable paying for it.
But for core large-cap equity exposure, the evidence strongly favours low-cost index funds for most investors.
How most investors are using passive
A common, sensible structure that has emerged: a low-cost index fund as the core of the equity portfolio, with a smaller active (or mid/small-cap) satellite for those who want a shot at extra return. This 'core-and-satellite' approach captures the low cost and reliability of passive, while leaving room for active where it might still help.
Tip
If you are a beginner and want simplicity, a single low-cost Nifty 50 index fund is a perfectly respectable entire equity core. You can always add a satellite later. Use our SIP calculator to see how a low-cost index SIP compounds over 20-30 years.
The bottom line
The passive boom is not hype, it is the market voting with its money based on a decade of hard data: most active funds, especially in large-cap, fail to beat a cheap index over the long run, and cost is a guaranteed drag. With passive at 18% of Indian AUM and rising (versus ~50% in the US), the trend likely has years to run.
That does not make active 'bad' - it makes cost and evidence matter. For most investors, a low-cost index fund core is the simplest, most reliable way to capture the market's long-term return, with active used selectively if at all.
To go deeper, read our guide on which mutual fund to invest in (the Nifty 50 index fund case), or build the fundamentals with the free Mutual Funds 101 course.
Frequently asked questions
What is passive investing?
Passive investing means putting money in funds that simply copy a market index (like the Nifty 50) instead of trying to beat it. A passive (index) fund holds the same stocks in the same weights as the index, so you get the index's return minus a very low cost. There is no active stock-picking.
Why are index funds becoming so popular in India?
Three reasons: data, cost and awareness. SPIVA reports show most active funds (about 73% of large-cap over 10 years) underperform their benchmark. Index funds cost far less (0.10-0.20% vs 1-1.5% for active). As more investors learned this, passive AUM grew from 3% of the industry in FY17 to about 18% (Rs 14.77 lakh crore) by 2026.
Are index funds better than active funds?
For core large-cap exposure over the long run, the evidence strongly favours low-cost index funds, since most active large-cap funds underperform after costs. Active can still add value in less-efficient segments like mid/small-cap or in debt, but picking the winning active fund in advance is hard. Many investors use a passive core with a small active satellite.
What is SPIVA?
SPIVA (S&P Indices Versus Active) is a twice-yearly scorecard from S&P Dow Jones Indices that measures how actively managed funds perform against their benchmark indices. SPIVA India consistently shows most active funds underperforming over long periods - about 73% of large-cap and 82% of mid/small-cap funds trailed their benchmark over the 10 years ending December 2025.
What is the difference between an index fund and an ETF?
Both track an index passively. An index fund is a regular mutual fund bought at end-of-day NAV, SIP-friendly, no demat account needed. An ETF (Exchange Traded Fund) trades on the stock exchange at live prices during market hours and needs a demat account, often at a slightly lower cost. For most SIP investors, an index fund is more convenient.
Is active management dead in India?
No. While most active large-cap funds underperform the index over the long run, active management can still add value in less-efficient areas like mid/small-cap (active mid/small funds had a majority-outperformance year in 2025) and in debt funds. The shift is about cost and evidence, not about active having zero role.
This article is for general education only and is not personalised investment, tax or legal advice. Mutual fund investments are subject to market risks. Read all scheme related documents carefully before investing. Tax rules are stated for the financial year 2025-26 and may change. Please consult a qualified adviser before acting on any information here.