India's mutual fund industry is undergoing a profound transformation, as investors increasingly embrace long-term, buy-and-hold strategies, according to a recent analysis by Motilal Oswal Financial Services. This strategic pivot is being primarily fueled by the accelerating adoption of passive investment vehicles, marking a significant change in how Indians approach wealth creation.
The Meteoric Rise of Passive Funds
The data reveals a dramatic expansion in the footprint of passive funds. Their share of the quarterly average assets under management (QAAUM) has skyrocketed to an impressive 17.1% as of September 2025. This is a substantial leap from a mere 7% recorded in the fiscal year 2020. The period between September 2021 and September 2025 witnessed explosive growth, with exchange-traded funds (ETFs) and index funds achieving compound annual growth rates (CAGR) of 28% and 81%, respectively.
This growth trajectory starkly outpaced the overall expansion of total equity AUM, which grew at a rate of 28%. The report explicitly highlights the fiscal year 2025 as a breakthrough period for passive investing. During this year, net inflows into these funds more than doubled, registering a staggering 118% increase year-on-year. A deeper look shows index funds led this charge with an extraordinary 278% surge in inflows, while ETFs also posted a robust 59% growth.
Understanding the Shift and a Recent Slowdown
So, what is driving millions of Indian investors towards passive funds? The core appeal lies in their fundamental structure. Passive funds, which simply track market indices like the Nifty 50 or Sensex instead of trying to outperform them, offer a low-cost investment alternative. This cost efficiency makes them particularly attractive for investors with long-term financial goals, as lower fees can significantly enhance net returns over decades.
However, the report also notes a recent moderation in this breakneck pace. For the period spanning April to October 2025 (YTDFY26), inflows into passive funds saw a decline of 34% compared to the previous year. This occurred alongside an 8% drop in overall equity fund flows. Analysts attribute this short-term slowdown to base effects, following a period of exceptional growth, and a temporary rotation of investor interest towards certain active fund categories such as flexi-cap and mid-cap funds.
Robust Long-Term Prospects and Industry Impact
Despite the recent cooldown, the long-term outlook for passive investing in India remains decidedly strong. The Motilal Oswal report emphasizes that several powerful factors will continue to sustain this trend. These include deepening investor confidence in low-cost products, a rapidly expanding variety of passive offerings, and greater adoption by large institutional players.
It is important to note that active funds continue to see healthy inflows, indicating a diverse and maturing market. The industry consensus is that passive funds will steadily continue to capture a larger market share over the coming years. Furthermore, the inherently low-cost nature of these funds provides significant scale benefits to asset management companies, which is expected to help safeguard their profitability even in a more competitive landscape.
