India Passive Funds Hit ₹12.92T as Active Funds Lag

India’s passive mutual fund assets have expanded almost fivefold, reaching ₹12.92 trillion since 2020. This substantial growth highlights a significant shift in investment patterns within the Indian market.

Passive funds now constitute only 16% of India’s total mutual fund assets, a stark contrast to the United States where they represent approximately 55%. Corporate investors drive much of this expansion, holding 73% of the total passive assets. Retail investor folios show nascent but growing adoption, increasing nearly ninefold to 3.83 crore.

This surge in passive investing coincides with the notable underperformance of numerous actively managed equity funds. Data reveals a significant percentage of these funds failed to outperform their benchmark indices over five-year rolling return periods, concluding in 2025.

Specifically, 41% of large-cap funds did not surpass their respective benchmarks, while 69% of mid-cap funds also underperformed. Small-cap funds showed slightly better, though still challenging, performance.

In light of these trends, financial advisors are increasingly advocating for a core-satellite investment strategy. This approach positions low-cost index funds as the portfolio’s core, providing broad market exposure.

The core is then complemented by selectively chosen active funds, particularly within segments like mid-cap and small-cap. These areas are perceived to have market inefficiencies that could still allow skilled active managers to generate alpha.

The ongoing discussion between active and passive investment methodologies will likely be shaped by future expense ratios. The ability of active fund managers to navigate an increasingly efficient and well-researched Indian market will be crucial.