India's Mutual Fund Industry Sees Major Shift to Passive Investing

India's mutual fund industry is shifting towards long-term, passive investing, according to a Motilal Oswal report. The AUM share of passive funds like ETFs and index funds has surged to 17.1% as of September 2025, up from 7% in FY20.

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.

Structural Shift Towards Passive Investing

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".

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.

Impressive Growth Metrics

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.

Recent Moderation in Flows

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.

Strong Long-Term Outlook

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.

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