Raamdeo Agrawal, the esteemed Chairman and Co-founder of Motilal Oswal Financial Services, foresees a significant shift in India's investment landscape: the increasing dominance of passive investing. Agrawal believes that as institutional participation in the Indian capital market expands and individual funds grow substantially, active fund managers will face mounting challenges in consistently outperforming market indices.
The Growing Footprint of Passive Funds in India
India's passive fund segment is already demonstrating considerable growth. As of May 2026, assets under management (AUM) for passive funds stood at an impressive Rs 14.77 lakh crore, comprising Rs 11.45 lakh crore in Exchange Traded Funds (ETFs) and Rs 3.32 lakh crore in index funds. This figure represents 18 percent of the total mutual fund AUM in India.
Comparing this to developed markets, Agrawal highlights that passive funds account for 50 percent of the industry AUM in the United States. While India's capital market is still in its nascent stages, suggesting a continued need for a blend of active and passive strategies, the trajectory is clear.
Key Drivers for Passive Investing's Ascent
Agrawal identifies several compelling reasons why passive investing is poised for rapid expansion in India:
- Challenge for Active Funds: As institutional money becomes larger and individual funds reach sizes of Rs 2-3 lakh crore, consistently beating the market index will become exceedingly difficult for active managers. This diminished alpha generation will naturally push investors towards lower-cost alternatives.
- Cost Efficiency: Passive funds boast significantly lower expense ratios, typically around 75-100 basis points, compared to active funds which can charge upwards of 1.5 percent. This cost differential compounds over time, offering substantial long-term savings for investors.
- Institutionalization of Capital: Agrawal predicts a rapid institutionalization of the Indian capital market, with institutional money potentially exceeding 30-35 percent by 2035. Many institutions, such as trust funds and societies, may lack the internal capability or mandate for active equity management, making passive funds an ideal solution.
- Simplicity and Broad Market Exposure: Passive funds offer a straightforward way to invest in an entire market or specific categories with minimal hassle. As seen with the S&P 500 in the US, broader indices in India will increasingly attract substantial funds.
Monitoring Performance and Future Outlook
For investors considering passive funds, Agrawal emphasizes the importance of monitoring the fund's "tracking error," with a lower error indicating better performance in mirroring its underlying index.
While historically, over a third of Indian mutual funds managed to beat the index over a ten-year period (compared to only 10-15 percent in the US), Agrawal firmly believes this will change. The sheer scale of future institutional investments will make consistent outperformance a rare feat, cementing the case for passive strategies. "Why do I pay 1.5 per cent management fee? I will take for 20-30 paisa index and be done with," he states, encapsulating the core appeal of passive investing.