India: Index Funds Gain Over ETFs for SIP Investment

Indian retail investors are increasingly shifting their passive investment capital towards index funds, moving away from Exchange Traded Funds (ETFs). This notable pivot, driven primarily by the administrative simplicity of Systematic Investment Plans (SIPs), marks a significant trend in the market.

Key Market Shift

• ETFs saw their market share in passive investing decline to 65.1% by March 2026.
• This represents a drop from 89.2% recorded in March 2021.
• Conversely, index funds’ assets under management climbed to ₹3.07 lakh crore.
• Index funds demonstrated a five-year compound growth rate of 74.1%.

The core of this preference lies in the operational ease offered by index funds. Unlike ETFs, which necessitate a demat account, brokerage fees, and managing bid-ask spreads, index funds function akin to traditional mutual funds.

Drivers Behind the Trend

• Index funds allow investors to establish automatic SIPs, eliminating the need for constant market monitoring.
• Retail investors prioritize this hands-off approach for consistent wealth accumulation.
• Many are willing to accept higher expense ratios in exchange for administrative simplicity.

Financial intermediaries significantly influence this trend, with commission structures favoring index funds. Distributors typically earn higher fees for selling index funds compared to ETFs, creating a clear incentive.

Distributor Influence

• Approximately 78% of smaller SIP contributions are facilitated through these distributor networks.
• Distributor advice plays a crucial role in shaping retail investment decisions.

While simplifying the investment process, this shift requires investors to consider certain trade-offs. Index funds generally carry higher expense ratios, potentially reducing net returns over time compared to lower-cost ETFs.

Investor Considerations

• ETFs offer real-time pricing throughout the trading day, allowing for immediate reactions to market swings.
• Index funds are priced once daily based on their Net Asset Value (NAV), limiting intraday responsiveness.

Investors should monitor if the cost disparity between index funds and ETFs narrows, and if sustained high inflows continue to fuel index fund growth within the broader mutual fund industry, which managed ₹73.73 lakh crore in assets as of March 2026.