Passive investing AUM in India has seen a spectacular eight-fold jump in the last five odd years, amid a rise in digital investment platforms, growing financial literacy and shifting behavioural trends among the young investors. Yet, the figures remain substantially lower than the trend seen in developed markets like the US.
Hemen Bhatia, ED and CEO, Angel One AMC, explains what remains the key reason behind this lag, factors that can further push passive investing and strategies that investors can focus on. Edited excerpts:
Passive investing is gaining momentum. What factors do you believe are driving the acceleration of passive investing among new-age investors?
India’s passive AUM has expanded more than eight-fold since March 2020, to ₹13.72 lakh crore in November’25, signalling a clear behavioural shift. The rise of digital investment platforms has been central to this trend. At Angel One AMC as well, we are observing a growing number of young investors using Index Funds and ETFs as foundational elements of their portfolios.
A key reason behind this shift is the structural evolution of the Indian market. With deeper financial penetration and a high concentration of skilled active managers, markets have become far more efficient. In an environment where information is widely available and disseminated in real time, the scope for consistently outperforming the benchmark has narrowed considerably. This is reflected in long-term performance trends, where many active investment strategies have found it challenging to consistently generate returns above their benchmarks.
As investors internalise this reality, they are gravitating toward products that offer clarity, cost advantages, and predictable index-linked outcomes. Combined with seamless digital access and a supportive regulatory framework, these factors have propelled the rapid expansion of passive investing in India’s asset management ecosystem.
Passive investing dominates in developed markets. What structural differences in India may promote a similar level of adoption?
Passive investing has long dominated developed markets because those ecosystems matured early, with deep institutional participation, highly efficient markets, and strong retail ETF penetration. Indian markets, too, are informationally efficient due to significant institutional participation. Structurally, therefore, contemporary Indian markets are more like developed markets.
So far, the asset management industry in India has been dominated by players who offer both active and passive products simultaneously. Both asset management styles being poles apart, it has so happened that the right education regarding the benefits of passive investing has not been done due to conflicted asset management business models. Active has thus seemingly overshadowed passive, even though there is a lot of Indian data available that favours passive.
Passive-only AMCs are a recent phenomenon, and with the advent of this trend, unapologetic investor education regarding the benefits of passive investing is now on the rise, as these AMCs have no conflicts with active asset management.
As a result, we expect more investors to understand the long-term benefits of passive investing. It is gradually dawning to investors that, before these regulatory announcements, historical alpha measurements, as often shown in long-term data, were inappropriate.
Hence, we believe that the level of adoption by all investor categories, including retail, will be on the ascendant in the coming years, as it has happened in more developed markets!
Additionally, on the distribution side, the growing presence of fintechs across India has made it easier to reach smaller towns and cities, helping passive investing expand to every corner of the country.
What new passive products do you expect to gain popularity in the next 3–5 years?
A core and satellite asset allocation approach is what we believe investors should follow. Hence, to fulfil this objective, as an AMC, we offer both broad market as well as Smart Beta index ETFs & Index Funds.
We think that the core component of the portfolio should be in broad market index products and the satellite component in Smart Beta index products.
Hence, the investor gets market return in the core allocation, which, in India, thus far, has been higher than inflation — the prime objective of equity investments.
In the satellite component of asset allocation, the expectation of getting market plus returns may be fulfilled through Smart Beta products, which are rule-based and hence eliminate fund manager subjectivity, behavioural biases and prejudices.
We believe that thematic funds can be risky as themes become attractive and go out of favour very quickly; most of the time, they are temporary fads.
We believe that, similar to trends witnessed in developed markets, wherein the traditional market-cap-weighted indices have the largest AUM, we will witness similar trends in India, too.
Do Indian retail investors fully understand the risks of passive investing—tracking error and liquidity, etc?
Tracking error is a quantitative factor which is understood by Indian investors. As far as ETF liquidity is concerned, the liquidity of passive funds is dependent on the liquidity of the underlying constituents, which are part of the index. Additionally, most of the fund houses have common market-making entities providing liquidity for their ETF units and hence liquidity is available as required.
Other than the above, it is the non-systematic risks, such as stock picking and fund manager selection, which are eliminated in passive investing.
As passive investing typically comes with lower margins, how does Angel One AMC plan to balance profitability with scale?
Active funds charge higher fees but also have a high cost of infrastructure and research due to large fund management teams/analysts. However, as active funds bloat in size on account of past performance, they face the challenges of alpha generation.
On the other hand, passive funds can handle huge AUMs as the underlying are indices. Currently, the largest MF scheme in the world is a passive scheme based on the US Total Market Index, and likewise, the largest MF scheme in India is a Nifty50 ETF.
The largest asset managers globally have substantial assets under management under passive schemes, and in future, we may see a similar trend in India too.
So, we see profitability as an outcome of scale, and we are confident that the adoption of a passive-only approach remains aligned with investor interests and ultimately benefits a large number of investors.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
