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India's Mutual Fund Revolution: Why Passive Investing Is Surging Amid Change

India's mutual fund industry is undergoing a significant transformation toward long-term investment strategies. Passive investing has entered a structural growth phase, with FY25 emerging as a breakout year for this approach. The share of passive funds in quarterly assets has more than doubled since 2020, reaching 17.1% by September 2025. While recent months show some moderation, the long-term outlook remains positive due to rising investor confidence in low-cost products.

Key Points: India Mutual Fund Shift to Long-Term Passive Investing Strategy

  • Passive fund share in QAAUM surged to 17.1% from just 7% in FY20
  • Index funds recorded 81% AUM CAGR while ETFs grew at 28% since 2021
  • Net inflows into passive funds more than doubled with 118% YoY growth in FY25
  • Despite recent moderation, long-term outlook remains strong due to low-cost appeal
  • Active funds maintain healthy growth alongside rising passive adoption
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India's mutual fund industry shifting to long-term investment strategy: Report

Motilal Oswal report reveals India's mutual fund industry shifting to long-term passive strategies, with passive fund share rising to 17.1% of assets since 2020.

"India's mutual fund landscape is experiencing a structural shift towards passive investing - Motilal Oswal Report"

New Delhi, November 19

India's mutual fund industry is witnessing a major shift as more investors are now adopting long-term goal, buy-and-hold strategies, according to a report by Motilal Oswal Financial Services.

The report highlighted that the structural change is coming with passive investing gaining strong momentum over the last few years.

As per the report, the share of passive funds in the quarterly average assets under management (QAAUM) has risen to around 17.1 per cent as of September 2025, up from 7 per cent in FY20.

It stated, "India's mutual fund landscape is experiencing a structural shift towards passive investing".

The report mentioned that over the period from September 2021 to September 2025, exchange-traded funds (ETFs) and index funds recorded AUM CAGR of 28 per cent and 81 per cent, respectively, while total equity AUM grew at 28 per cent.

This indicates a sharp rise in the popularity of low-cost, benchmark-linked investment options.

The report noted that passive investing has now entered a structural growth phase, with FY25 emerging as a breakout year.

Net inflows into passive funds more than doubled, rising about 118 per cent year-on-year, supported by a steep 278 per cent increase in index fund flows and a 59 per cent rise in ETF flows, it said.

Passive investing typically involves tracking a market index rather than trying to outperform it, and uses low-cost vehicles like index funds and exchange-traded funds (ETFs), making it attractive for long-term investors.

However, the report stated that flows have moderated in YTDFY26 (April-October 2025). During this period, passive inflows fell 34 per cent year-on-year, while equity fund flows declined 8 per cent.

This slowdown is attributed to base effects and a shift in investor interest toward active fund categories such as flexi-cap and mid-cap funds.

Despite the short-term moderation, the long-term outlook for passive funds remains strong. The report said this trend is supported by rising investor confidence in low-cost products, wider product offerings, and increasing adoption by institutional investors.

At the same time, active funds are also seeing healthy growth. As a result, the share of passive funds within the overall industry is set to rise.

However, since passive funds involve minimal costs, the scale benefits are likely to help protect overall profitability for these firms.

- ANI

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Reader Comments

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Priya S
As a young professional, I find passive investing perfect for my retirement planning. The low fees make a huge difference over 20-30 years. More awareness about compounding benefits would help many middle-class families achieve their financial goals.
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Sarah B
While passive investing is great, I'm concerned that the recent moderation in flows might indicate retail investors are getting impatient again. Many Indians still chase short-term gains rather than sticking to disciplined SIPs. Hope this trend continues despite the temporary slowdown.
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Arjun K
The 81% CAGR in index funds is impressive! This shows how Indian markets are evolving. With more millennials and Gen Z entering the market, this trend will only accelerate. Better financial literacy in schools would help sustain this growth 📈
M
Michael C
As an NRI investor, I've noticed Indian mutual funds are catching up with global trends. The shift to passive investing mirrors what happened in US markets a decade ago. The key challenge will be maintaining discipline during market volatility - that's where many Indian investors struggle.
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Kavya N
This is good news for small investors like me. Active funds with high expense ratios were eating into our returns. Now with passive options, we can participate in market growth without worrying about fund manager performance. More transparency in fees would be even better!

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