India's passive investing revolution has reached a significant milestone. The combined assets under management of index funds and exchange-traded funds (ETFs) crossed Rs 3 lakh crore in February 2026, according to AMFI data. This represents a four-fold increase from Rs 75,000 crore in March 2021, marking one of the fastest-growing segments within the Indian mutual fund industry.
The Active vs Passive Debate in India
The shift toward passive investing is grounded in performance data. The latest SPIVA India Scorecard, published by S&P Dow Jones Indices, reveals that 72 percent of active large-cap funds underperformed the S&P BSE 100 index on a one-year basis, and 68 percent underperformed on a three-year basis. Over five years, the underperformance rate climbed to 64 percent. After accounting for expense ratios, which average 1.5 to 2 percent for active large-cap funds compared to 0.1 to 0.3 percent for index funds, the gap widens further.
SEBI's 2018 recategorisation norms, which restricted large-cap funds to investing at least 80 percent in the top 100 stocks by market capitalisation, inadvertently made it harder for active managers to generate alpha. With a constrained investable universe and high correlation among the top holdings, most active large-cap funds have effectively become closet index funds charging active management fees.
Product Innovation Fuelling Growth
The product landscape has evolved rapidly. In 2020, Indian investors had access to roughly 60 index fund and ETF schemes. Today, that number exceeds 250, covering the Nifty 50, Nifty Next 50, Nifty Midcap 150, Nifty 500, sectoral indices, factor-based indices (momentum, value, quality, low volatility), and even international indices like the S&P 500 and Nasdaq 100.
Fund houses have also launched target-maturity debt index funds, which mimic the characteristics of a fixed deposit while offering indexation benefits. These products attracted over Rs 40,000 crore in the 18 months since their introduction and have become popular with conservative investors seeking tax-efficient fixed-income alternatives.
The Cost Advantage Is Real
The expense ratio differential between active and passive funds is the single most reliable predictor of long-term relative performance. Consider two investors, each investing Rs 1 lakh per month in a strategy that delivers a pre-expense return of 12 percent annually. Over 20 years, the investor in a passive fund with a 0.2 percent expense ratio accumulates approximately Rs 9.82 crore. The investor in an active fund with a 1.8 percent expense ratio accumulates Rs 8.24 crore. The Rs 1.58 crore difference is entirely explained by fees compounding over time.
Where Active Management Still Adds Value
It would be premature to declare active management dead in India. In the mid-cap and small-cap segments, active fund managers continue to outperform benchmarks more consistently. The SPIVA data shows that only 38 percent of active mid-cap funds underperformed their benchmark on a three-year basis, a significantly better hit rate than large-caps. The mid-cap and small-cap segments are less efficient, with wider information asymmetries, lower analyst coverage, and greater mispricing opportunities that skilled managers can exploit.
A practical approach for most investors is to use index funds for large-cap exposure, where alpha generation is minimal, and consider active funds for mid-cap and small-cap allocations, where the probability of outperformance is higher. This core-satellite strategy captures cost efficiency where it matters most while retaining the potential for alpha where it is achievable.
Use our SIP Calculator to model the long-term impact of investing in low-cost index funds versus higher-cost active funds. The difference in corpus over a 15-to-20-year horizon may surprise you. Passive investing is not about settling for average returns; it is about systematically capturing market returns at the lowest possible cost.
Source
AMFI Monthly AUM Data Feb 2026, SPIVA India Scorecard H2 2025, NSE ETF Report