The Passive Takeover: New large-cap money is flowing into index funds

INDIA’S MUTUAL FUND industry is witnessing a quiet revolution. Nearly 70 per cent of incremental large-cap money is now heading into passive funds—index funds and ETFs—up­ending a decade of active-manager dominance.

Institutional leadership is the biggest catalyst. Pension funds and large institutions increasingly use index funds to manage long-term liabilities efficiently. But the trend isn’t just institutional—HNIs and retail investors have embraced passive investing over the last six years, with passive assets growing at an 80-100 per cent CAGR.

In active funds, investors must choose both a category and a fund manager. Passive funds require only one decision: which index to track. The product universe has exploded beyond Nifty 50 and Sensex, now including mid-cap, small-cap, international, thematic, momentum, defence, and clean-energy indices.

Market efficiency is crippling active outperformance. Large-cap stocks are heavily researched, making consistent alpha generation difficult. SPIVA India data shows that in 2025, 65-66 per cent of active large-cap funds underperformed their benchmarks. Broad market indices already outperform 60-70 per cent of active managers in large-cap space.

However, costs remain the silent killer. Passive funds charge expense ratios as low as 0.05 per cent, compared to typical active fund fees of 1–1.5 per cent. That 1 per cent difference compounds dramati­cally over 20 years, eroding final wealth significantly.

Today’s investor wants targeted exposure at lower cost without relying on manager skill. In large-cap categories, passive strategies now deliver equal or superior returns after fees. While active funds still matter in mid-cap and small-cap space, the large-cap domain has tilted decisively toward passive. India isn’t yet at the US stage (where passive accounts for 60 per cent of assets under management), but the trajectory is unmistakable.