By Dalal Street Investment Journal (DSIJ)
India’s mutual fund industry is witnessing a major structural shift, with passive investing through index funds and ETFs gaining ground in line with global trends. Driven by cost-conscious investors and growing awareness, India’s passive AUM has surged nearly 8-fold since January 2020, highlighting the rising appeal of low-cost, rules-based investing. Know why index funds and ETFs are gaining ground in India.
India’s stock market is one of the world’s largest, with a market capitalisation of around $5 trillion. It is also backed by one of the fastest-growing mutual fund industries, with assets under management (AUM) of about ₹82 lakh crore. As per Franklin MF House data as of May 2025, India’s MF/AUM has grown around 20% CAGR over the last 10 years against the US’ 8% (~$39 trillion AUM). But if we compare MF/AUM penetration in terms of GDP, India has only ~24% (GDP for FY2025-26 estimated to attention ₹345.47 lakh crore; mutual fund AUM ₹82 lakh crore) against the US’s 103% (GDP $30.8 trillion (2025); mutual fund AUM $31.80 trillion in January 2026). Thus, there is a space for significant CAGR for India with the mutual fund industry in the coming years as the country aims to be a developed economy by 2047. India's mutual fund AUM growth is now being driven by a structural shift in household savings ─ the number of investor folios reached over 27 crore in February '26, with a monthly SIP hitting a record of around ₹31,000 crore/month in early 2026.
India’s MF industry is now witnessing a monumental structural shift from actively managed funds to passive index funds and also ETFs (Exchange Traded Funds) ─ in line with global trends, led by cost-conscious retail investors, digital platforms, and a growing reality that consistent market returns often outperform expensive stock-picking strategies.
According to the latest official data from the Association of Mutual Funds in India (AMFI) for February 2026, India’s AUM for passive funds was around ₹15.24 lakh crore, although marginally down from the record high of ₹15.41 lakh crore in January '26 due to MTM (mark-to-market) adjustments are still over an 8-fold increase from around the ₹1.92 lakh crore size in January 2020 (before COVID). This passive funds MF segment is now almost 18.6% of the total MF industry AUM, around ₹82.03 lakh crore ─ up significantly from just around 8% in 2020.
The phenomenal surge in passive MF investing is now not merely numerical, but it’s structural and remarkably resilient, especially after the post-COVID surge in retail participation. The black SWAN event, like COVID, shows that market panic (corrections) is cyclical and often healthy, and regular investing (SIPs) in Index/passive funds and ETFs gives structural return. The passive investing SIP inflows reached a record of around ₹39,955 crore in January '26 and remained positive at ₹13,879 crore in February despite shorter trading days and market corrections. The epic surge in passive AUM is being led by Index funds, Equity market-related ETFs and Gold ETFs ─ led by comparatively low-cost and transparent investment tools in India’s financial market.
Passive investing funds ─ the breakdown by category (February 2026 month-end AUM):
Other ETFs (primarily domestic equity trackers): ₹9.76 lakh crore
Index funds: ₹3.25 lakh crore
Gold ETFs: ₹1.83 lakh crore
Overseas fund of funds: ₹0.40 lakh crore
February 2026 inflows moderated from January’s peak (₹39,955 crore) but remained impressive at ₹13,879 crore across passive categories.
Gold ETFs led with ₹5,255 crore vs ₹24,040 crore in January '26.
Other ETFs: ₹4,487 crore
Index funds—₹3,233 crore—zoomed from January’s low base of ₹27 crore
Overseas fund of funds: ₹904 crore
This diversification underscores how passive products now span equities, commodities, and global exposure, catering to varied risk appetites ─ ensuring volatility as an opportunity. These figures, drawn directly from AMFI’s Monthly data, demonstrate that inflows are not sporadic but part of a sustained retail shift looking for timing in the market. Passive MF schemes now frequently outpace certain active categories in monthly collections, particularly during periods of market consolidation/corrections.
Cost Efficiency—Low Cost and Expense Ratios: Passive MFs generally cost 0.1-0.5% against 1.0-2.0% for active funds. This cost advantage is significant if we consider a 10-15 year horizon and the compounding effect. This may result in higher returns on investment.
Lower Volatility/Performance Consistency: Most of the active funds, especially in the large-cap category, failed to beat the benchmark (index—say Nifty) return over 5-10 year periods, while passive funds deliver market/benchmark return after deducting minimal fund management costs. An index/benchmark is a combination of various stocks and cyclical sectors and often has lower volatility than many individual stocks/large caps. This ensures steady performance for passive funds against active ones. Example: In recent months, IT stocks corrected much more than the benchmark Index Nifty. An index is a combination of diversified stocks/sectors that often hedge each other, causing comparatively lower volatility than individual stocks.
Transparency and Simplicity: Passive index funds or ETFs follow clear rule-based fund management rather than the discretion & analytical wisdom of individual fund managers. This ‘auto-pilot’ mode or ‘set-it-and-forget-it’ approach aligns perfectly with systematic investment plans (SIPs), now a cornerstone of retail participation—avoiding market noise, focusing on core financial performances. For retail investors, it’s easier to track benchmarks/indices like Nifty or Sensex rather than individual stocks.
Rising Retail Awareness—especially after COVID: Digital platforms, fintech apps, and educational campaigns have accelerated retail awareness & access. Surveys indicate over 70% awareness of passive products among retail investors, with many incorporating them as core portfolio holdings.
Diversification and Hedging: Gold and silver ETFs have surged as portfolio diversifiers during equity volatility. Thematic and factor-based index funds further allow targeted exposure without concentrated risk.
Smart Regulation and Product Innovation: SEBI’s emphasis on low-cost structures, coupled with new launches (including international and strategy/thematic indices), has expanded the menu. Demat-linked ETFs have lowered entry barriers for younger, tech-savvy investors. SEBI also introduced an MF Lite framework in late 2024—a ‘light-touch’ regulatory regime for passive-only fund houses with reduced entry barriers.
Institutional Push: Active participation by institutions like EPFO in index funds and ETFs boosted liquidity and AUM.
Overall, these factors are cumulatively boosting passive AUMs, especially among first-time and millennial and Gen-Z investors in metros and Tier-2 cities. India’s passive penetration, while still below the US (where passive assets exceed 50% of mutual fund AUM ), is catching up faster than most EMEs (emerging market economies). The industry’s overall AUM has tripled in five years, yet passive growth has outstripped this pace, reflecting a conscious reallocation from active to passive instruments.
India’s retail passive investing revolution is no longer cyclical; it’s now structural, helping in retail wealth creation with investing habits rather than wealth destruction through indiscriminate direct trading in the stock market (F&O). The passive AUM is now around ₹15 lakh crore, almost 18% of total AUMs, and DSP Mutual Fund expect may be 25-30% by 2028-30. Although India is now the 4th largest economy and stock market in the world, in terms of penetration, only a minuscule part of the population invests directly or indirectly in the financial market. As India’s economy expands and financial inclusion deepens, passive investing will play an increasingly central role in encouraging retail participation & potential long-term wealth creation.
SEBI Registered Research Analyst (INH000006396).
Founded in 1986, Dalal Street Investment Journal (DSIJ) brings decades of experience in India’s equity markets. DSIJ's research combines fundamental analysis with price action, guided by disciplined risk management and capital preservation. They follow a structured, data-driven approach designed to help investors and traders make informed decisions beyond short-term market noise.
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