In the first seven months of 2024, the Indian mutual fund industry witnessed a surge in passive fund offerings. A total of 106 new fund offers (NFOs) were launched, comprising 63 passive schemes.
This number reflects an uptick from the 51 passive funds introduced in 2023, according to data from Ace Equity MF.
This growth in passive investing, particularly through thematic and index schemes, reveals an evolving trend among investors.
Factors driving growth
Alekh Yadav, Head of Investment Products at Sanctum Wealth, said that “one key reason for the growth of passive funds is the challenge active funds have in beating benchmarks, especially in the large-cap segment.”
This, coupled with the ease of understanding and the lower cost structure of passive funds, has made them an attractive option for both retail and seasoned investors.
Prashant Kumar, Founder & CEO of Kredit.pe, noted that passive funds’ performance often mirrors the state of the economy.
“For a growing economy like ours, passive funds tend to perform better than many actively managed funds due to their broad-based exposure and reduced volatility,” he told CNBC-TV18.com.
Performance and returns
While active funds historically promise to deliver alpha, data shows that over the long term, passive funds often outperform the majority of active funds.
In this context, ‘alpha’ refers to the excess return that an active fund aims to generate over a benchmark index.
As Kumar highlighted, “Over a 10-year horizon, passive funds outperform over 90% of managed funds, making them a safe long-term investment.”
This growing realisation among investors has fueled the rise in index and thematic funds.
New strategies in the passive space, such as factor-based funds, are also gaining momentum.
Feroze Azeez, Deputy CEO of Anand Rathi Wealth Limited, noted that “the inflow of factor-based investing has grown significantly, with the AUM in this category rising from ₹7,050 crore to ₹26,363 crore in just one year.”
However, he advised caution with these newer strategies, as they are still in the experimental phase and lack a track record.
To illustrate the performance differences, the table below compares the returns of various active and passive funds over one, three, and five years:
| Scheme name | Category | 1-year | 3-year | 5-year |
| Large Cap Funds | ||||
| Nippon India Large Cap Fund(G) | Large Cap Fund | 37.88% | 24.22% | 22.93% |
| Passive funds | ||||
| Nippon India ETF Nifty 50 BeES | ETFs | 29.05% | 15.92% | 19.03% |
| Mid Cap Funds | ||||
| Motilal Oswal Midcap Fund-Reg(G) | Mid Cap Fund | 69.51% | 38.4% | 33.87% |
| Passive funds | ||||
| Motilal Oswal Nifty Midcap 150 Index Fund-Reg(G) | Index Funds | 50.47% | 27.8% | |
| Small Cap Funds | ||||
| Bandhan Small Cap Fund-Reg(G) | Small-cap Fund | 74.68% | 28.97% | |
| Passive funds | ||||
| Motilal Oswal Nifty Smallcap 250 Index Fund-Reg(G) | Index Funds | 55.82% | 27.34% |
(Source: Anand Rathi Wealth)
Role in diversified portfolios
Passive funds have found their place in diversified portfolios, particularly for retail investors who prefer a hands-off approach.
Yadav believes passive funds “are well-diversified across stocks and sectors, reducing the risk of concentration.”
Similarly, Kumar said that passive funds “are one of the best long-term bets for any investor, providing assured and worry-free returns with lower management charges.”
Santosh Joseph, CEO and Founder of Germinate Investor Services LLP, said passive funds are best suited for investors who don’t require active management.
He pointed out that “active strategies, particularly in the small and mid-cap space, can outperform indices, making active funds more attractive for certain investors.”
Liquidity in passive funds
Liquidity is another key consideration for investors.
Yadav explained that liquidity is generally not a concern for passive funds in India, except in the case of certain ETFs where exchange-traded volumes may be low.
For large investments, index funds may offer better liquidity than ETFs.
Joseph added that ETFs enjoy greater liquidity since they are available for purchase and sale on stock exchanges.
“The biggest advantage of investing in passive mutual funds is the well-defined and honoured liquidity window,” he noted.
The road ahead
As the Indian market continues to mature, the debate between active and passive investing will evolve.
While passive funds are gaining popularity for their simplicity, cost-effectiveness, and long-term performance, active funds still hold appeal for investors seeking to outperform the market.
“We are not yet a mature market like the US, and there is immense alpha generation potential in the coming decade, making active space more attractive,” Azeez said.
For now, passive investing is set to continue growing, driven by a mix of new offerings, changing investor preferences, and a growing awareness of its benefits.
As Kumar puts it, “I foresee significant growth in passive investing as stock market penetration expands and more seasoned investors recognise its potential.”