The landscape of investing in India is undergoing a significant transformation, with passive investment strategies witnessing explosive growth. The Assets Under Management (AUM) for passive funds in the country have experienced a spectacular eight-fold increase in the last five years, surging from levels in March 2020 to reach a staggering ₹13.72 lakh crore by November 2025. This remarkable ascent is fueled by the proliferation of digital investment platforms, rising financial literacy, and a notable behavioural shift among a new generation of investors.
Digital Platforms and Market Efficiency Fuel the Surge
According to Hemen Bhatia, ED and CEO of Angel One AMC, this dramatic growth signals a clear change in investor mindset. A central pillar of this trend is the rise of digital platforms, which have democratised access to investment products. Angel One AMC itself reports a growing cohort of young investors who are now using Index Funds and ETFs as foundational components of their portfolios.
Bhatia points to the structural evolution of Indian markets as a key driver. With deeper financial penetration and a high concentration of skilled active fund managers, markets have become far more efficient. In today's environment, where information is widely available and disseminated in real-time, the opportunity for fund managers to consistently outperform the benchmark has narrowed considerably. Long-term performance data reflects this, showing many active strategies struggling to beat their benchmarks consistently.
As investors recognise this reality, they are increasingly drawn to passive products that offer clarity, lower costs, and predictable, index-linked returns. This shift, combined with seamless digital access and supportive regulations, has propelled the rapid expansion of passive investing within India's asset management ecosystem.
Bridging the Gap with Developed Markets
While the growth is impressive, passive investing's share in India remains substantially lower than in developed markets like the US. Bhatia explains that a historical conflict in business models has contributed to this lag. Traditionally, the Indian asset management industry has been dominated by firms offering both active and passive products. Since these two styles are poles apart, the right education about the benefits of passive investing often took a backseat, with active management seemingly overshadowing passive options.
The landscape is now changing with the advent of passive-only Asset Management Companies (AMCs). These entities, free from the conflict of promoting active funds, are leading an "unapologetic" investor education drive about the advantages of passive investing. Bhatia believes this will lead to greater understanding and adoption among all investor categories, including retail, mirroring the trajectory of developed markets.
Furthermore, the growing reach of fintech platforms across smaller towns and cities is helping passive investment products expand to every corner of the country, ensuring wider accessibility.
The Future: Core-Satellite Approach and Smart Beta Products
Looking ahead to the next 3-5 years, Bhatia expects certain passive products to gain significant popularity. He advocates for a core and satellite asset allocation approach for investors. The core of the portfolio, he suggests, should be in broad market index products (like Nifty 50 or Sensex ETFs), which aim to deliver market returns that have historically outpaced inflation in India.
The satellite portion, aiming for potential market-plus returns, can be allocated to Smart Beta index products. These are rule-based strategies that eliminate fund manager subjectivity and behavioural biases. Bhatia cautions against thematic funds, noting they can be risky as investment themes can quickly go in and out of favour.
On the question of risks, Bhatia clarifies that Indian investors generally understand quantitative factors like tracking error. Regarding ETF liquidity, he notes it is dependent on the liquidity of the underlying index constituents and that most fund houses employ market-makers to ensure liquidity is available.
Profitability Through Scale in a Low-Cost Model
A common concern regarding passive investing is its lower fee structure and how AMCs maintain profitability. Bhatia addresses this by contrasting the cost structures. Active funds charge higher fees but also incur significant costs for research and large investment teams. As they grow in size, generating alpha becomes more challenging.
Passive funds, however, can efficiently handle huge AUMs as they track indices. He cites examples: the largest mutual fund scheme globally is a passive US Total Market Index fund, and the largest scheme in India is a Nifty50 ETF. Profitability, therefore, becomes an outcome of achieving scale. Bhatia is confident that the passive-only approach aligns with investor interests and, by benefiting a large number of investors, will ultimately lead to sustainable business growth for focused AMCs.
