Passive investing gains ground: What’s driving the shift to index funds and ETFs?

Are investors increasingly using passive funds to achieve their financial goals? Passive funds attracted ₹ 1.29 lakh crore in net inflows, including ₹ 1.07 lakh crore into Exchange Traded Funds (ETFs) and ₹ 22,395 crore into index funds in the year-to-date (YTD) 2026. Within ETFs, the Nifty/Sensex category attracted ₹ 61,054 crore, followed by Gold ( ₹ 39,475 crore) and Silver ( ₹ 11,211 crore).

Assets Under Management (AUM) of passive funds surged 24.4% year-on-year to ₹ 15.15 lakh crore at the end of July 2026, data with National Stock Exchange (NSE) showed. They now account for 18% of the overall AUM of the mutual fund industry. Index funds are not merely used to replicate markets, but to construct diversified portfolios aligned with long-term financial goals.

“Passive funds offer investors the flexibility to invest across a wide range of indices spanning different asset classes and investment themes,” said Diipesh Shah, Executive Director and Fund Manager, DSP Mutual Fund. “They are relatively low-cost in nature, making them an attractive choice for cost-conscious investors,” he said.

“The product range has also become much wider. Investors are no longer restricted to just the Nifty 50 or Sensex. They can now get passive exposure to large-caps, mid-caps, sectors, themes, factor strategies and international markets,” said Ajay Kumar Yadav, Group CEO and CIO, Wise Finserv, a financial services firm that offers financial planning and wealth management, among others.

NSE indices currently list more than 200 ETFs and index funds tracking Nifty indices in India, which shows how much the passive ecosystem has expanded. “Another reason is that investors are becoming more aware that consistently beating an index is not easy, particularly in large-cap stocks where information is widely available and companies are closely researched,” Yadav stated.

“So, for many investors, the thinking has changed from ‘Which fund will beat the market?’ to ‘Why not simply own the market at a low cost?” he said. “That does not mean active management is becoming irrelevant. It simply means investors now see passive funds as a serious part of the portfolio rather than just an alternative product,” he said.

“Passive funds are an easy way to gain diversified exposure to market indices without having to go to the trouble of picking the right fund manager themselves,” said Mukesh Pandey, MD and Founder, Rupyaapaisa.com, a financial consultancy. “Additionally, the advent of online investment platforms and the entry of young investors into the mutual fund world have further facilitated the process.”

Cost is another important factor. “ Passive funds generally have lower expense ratios because the fund manager is not actively selecting stocks. Over a long investment period, even a small difference in annual cost can make a meaningful difference to the final corpus,” Yadav said.

Passive funds have done well vis-à-vis directly managed funds in developed markets.