Passive vs Active: The Structural Shift Reshaping Indian AMC Business Models
Executive Summary
Passive mutual fund assets in India grew roughly sixfold over five years to cross an estimated ₹14.6 lakh crore by FY26, expanding from about 10% of industry AUM in 2021 to close to 18% today, even as passive fund folios grew 40% year-on-year. This is not yet the wholesale passive takeover seen in the United States, where passive strategies dominate net flows, but the direction of travel is unambiguous, and India’s largest AMCs, including the country’s biggest fund house by AUM, are explicitly building dual-track strategies that treat passive as a genuine growth engine rather than a defensive necessity. For AMC leadership, the strategic question has shifted from whether to offer passive products to how quickly fee structures, distribution economics, and talent allocation should rebalance around a category growing faster than the industry average.
Introduction
The active-versus-passive debate in Indian asset management has historically been muted relative to Western markets, largely because India’s equity markets have offered more persistent alpha opportunities for skilled active managers than mature developed markets. That premise is now being tested by scale: as passive AUM compounds at roughly 36% CAGR, even a modestly shrinking alpha opportunity set changes the economics for AMCs that have built their entire fee model around active management.
Industry Background
SEBI’s 2013 direct plan mandate and subsequent cost-transparency rules created the regulatory conditions for passive growth by making total expense ratios more visible and comparable to investors. Passive AUM as a share of total industry assets moved from about 2% in 2016 to roughly 10% by 2021, and has continued compounding since, a trajectory that mirrors, with a meaningful lag, the passive-investing shift seen earlier in the United States and Europe.
Current Market Landscape
By FY26, passive assets under management (ETFs, index funds, and fund-of-funds) reached approximately ₹14.63 lakh crore, with more than 700 passive schemes now available and folios expanding 40% year-on-year to roughly 5.7 crore. Growth has not been uniform across passive sub-categories: silver ETF folios grew over 500% year-on-year on the back of a strong 2025 bullion rally and favourable long-term capital gains tax changes, while debt index funds and gold ETFs also posted outsized folio growth, even as month-to-month net inflows have shown signs of moderation, with several passive categories recording net outflows in a single recent month despite strong headline AUM growth.
[Insert Chart: Passive fund AUM as % of total Indian mutual fund industry AUM, 2016–2026]
Latest Industry Statistics
India’s largest AMC by overall assets is also its largest passive fund manager, holding roughly ₹4 lakh crore in passive AUM and close to 30% market share in ETFs and index funds combined, according to disclosures made ahead of its public listing. That AMC’s leadership has explicitly stated an expectation that passive segment growth will outpace active going forward, citing the pattern already observed in more mature international markets, while affirming a continued dual-track commitment to both active and passive product innovation. Separately, retail investor awareness and adoption of passive products has risen meaningfully: roughly 68% of retail mutual fund investors held at least one passive product in 2025, up from about 61% in 2023, though close to a third of investors still remain outside the passive universe, citing greater confidence in active management or simple unfamiliarity with passive products.
Regulatory & Policy Updates
SEBI’s regulatory posture has generally been to enable passive growth through cost transparency and category clarity rather than to mandate it directly. The regulator’s broader push toward index-linked, rules-based, and transparent product structures, visible across ESG index funds tracking benchmarks such as the Nifty 100 ESG TRI, reflects the same underlying preference for verifiable, rules-based investment processes that shows up elsewhere in SEBI’s recent rulemaking, including its ESG and Responsible AI/ML frameworks.
Key Industry Challenges
The central challenge for AMCs with active-heavy revenue models is fee compression: passive products typically carry expense ratios a fraction of comparable active schemes, meaning even modest AUM migration from active to passive categories can meaningfully compress blended AMC revenue per rupee of assets managed. A second challenge is distribution economics, since passive products generally carry lower or no distributor commission, reducing the economic incentive for traditional IFAs to recommend them even where they may better suit a given investor. A third challenge, visible in the passive category’s own flow data, is volatility of net inflows despite strong AUM growth, several passive sub-categories have recently seen thin or negative monthly net flows even as year-on-year AUM and folio growth remain robust, complicating revenue forecasting for AMCs leaning further into the category.
Strategic Analysis
AMCs appear to be converging on one of two coherent strategic postures rather than resisting the shift outright. The first, exemplified by India’s largest AMC, is explicit dual-track investment: continuing active product innovation for categories where genuine alpha persists (small-cap, sector rotation, credit-focused debt) while building scaled passive capability as a volume and market-share engine, accepting lower per-unit fees in exchange for AUM scale and distribution reach. The second, more common among smaller or newer AMCs, is focused specialisation, competing on active alpha in a narrower set of categories rather than attempting to match incumbents’ passive scale, since passive economics favour AMCs that can achieve genuine cost leadership through volume.
Technology Trends
Passive product manufacturing and distribution are increasingly technology-driven end to end: index replication, rebalancing, and creation-redemption processes for ETFs rely on automated systems that keep tracking error low and operating costs minimal, while distribution increasingly happens through digital-first platforms and direct plans that further compress the cost of reaching investors. This technology-cost alignment is part of why passive AMCs can sustain lower fees profitably at scale in a way that would be difficult to replicate with a fully human-mediated active distribution model.
Business Implications
For CFOs, the passive shift changes long-term revenue-per-AUM assumptions in financial planning models, requiring more conservative blended fee projections as passive share of total AUM continues rising. For CXOs overseeing product strategy, the implication is a need for genuine category-level portfolio thinking, deciding explicitly which active categories the AMC will defend on alpha generation, and which the AMC concedes to passive competition, rather than attempting cost leadership and alpha generation simultaneously across every category.
Case Studies
India’s largest AMC’s dual-track passive-active strategy. Ahead of its public listing, the country’s largest fund house by AUM disclosed passive assets of roughly ₹4 lakh crore, translating to close to 30% market share in ETFs and index funds. Its leadership publicly acknowledged that passive segment growth is expected to outpace active going forward, drawing an explicit comparison to more mature international markets where passive already dominates net flows, while affirming continued investment in active product innovation, an illustration of how India’s largest incumbent is choosing to compete on scale in both categories rather than picking one.
The 2025 silver and gold ETF folio surge. Passive fund folio growth in the year to May 2026 was disproportionately driven by precious metals categories, with silver ETF folios growing over 500% year-on-year following a strong 2025 bullion rally and a favourable change reducing the long-term capital gains holding period to one year with a 12.5% cap. This episode illustrates how passive product categories can experience sharp, tax-and-commodity-cycle-driven adoption surges distinct from the steadier structural growth seen in equity index funds, complicating simple extrapolation of passive growth trends across sub-categories.
Best Practices
AMCs should build category-level strategic clarity, explicitly identifying which active categories justify continued premium fees based on demonstrable, persistent alpha, and which face genuine passive substitution risk, rather than defending active fees uniformly across the product shelf. Distribution and incentive design should be reviewed specifically for passive product economics, since standard commission-linked distributor incentives are structurally mismatched to low-fee passive products and may require different servicing or advisory-fee-based models to sustain distributor engagement.
Executive Recommendations
Boards should require an annual category-level fee compression analysis, modelling blended revenue-per-AUM under scenarios where passive share of industry AUM continues its current trajectory. Product strategy leadership should make an explicit, board-approved decision on where the firm will compete on active alpha versus passive scale, rather than allowing the product shelf to expand reactively in both directions without a coherent underlying strategy.
Future Outlook
Passive AUM is likely to continue outpacing active fund growth over the medium term, though India’s passive share of roughly 18% of total industry AUM remains well below the levels seen in more mature markets, suggesting continued headroom rather than imminent saturation. Precious metals and international fund-of-funds categories are likely to remain more volatile passive sub-segments, driven by commodity cycles and tax treatment changes, while core equity index funds are likely to show steadier, more structural growth.
Conclusion
The passive-active shift in Indian mutual funds has moved from an emerging trend to a measurable structural repricing of the industry’s fee base, and AMC leadership that treats this as a category-by-category strategic choice, rather than an existential threat to active management as a whole, is best positioned to navigate the transition profitably.
Frequently Asked Questions
1. How much has passive fund AUM grown in India? Passive fund AUM grew roughly sixfold over five years, reaching an estimated ₹14.6 lakh crore in FY26, up from about ₹2.2 lakh crore in 2019, at a compound annual growth rate of approximately 36%.
2. What share of Indian mutual fund AUM is now passive? Passive assets represent roughly 18% of total industry AUM as of FY26, up from about 10% in 2021 and 2% in 2016.
3. Which AMC is India’s largest passive fund manager? India’s largest overall AMC by AUM is also its largest passive fund manager, holding close to 30% market share across ETFs and index funds combined.
4. Why did silver ETF folios grow so sharply in 2025-26? Silver ETF folios grew over 500% year-on-year, driven by a strong 2025 bullion price rally and a tax change reducing the long-term capital gains holding period to one year with a 12.5% cap.
5. Are passive funds cheaper than active funds in India? Yes, passive products typically carry expense ratios well below comparable active schemes, which is a core driver of their growing retail adoption.
6. Is active fund management becoming obsolete in India? No, active management continues to attract strong inflows, particularly in categories like small-cap and sector-specific funds where demonstrable alpha persists; the shift is toward a more explicit dual-track industry rather than passive dominance.
7. How many retail investors in India hold passive products? Roughly 68% of retail mutual fund investors held at least one passive product in 2025, up from about 61% in 2023.
8. Do distributors earn commission on passive funds? Passive products generally carry lower or no distributor commission compared to active funds, which affects how strongly traditional distributors are incentivised to recommend them.
References
- DD News. “India’s passive MF AUM grows six-fold to Rs 12.2 lakh crore in 5 years: Report.” 2025. https://ddnews.gov.in/en/indias-passive-mf-aum-grows-six-fold-to-rs-12-2-lakh-crore-in-5-years-report/
- Finnovate. “Passive Fund Flows May 2026: AUM Up 25%, Net Inflows Near Zero.” 2026. https://www.finnovate.in/learn/blog/passive-fund-flows-may-2026-india-aum-data
- SMC Trade Online. “All You Need to Know About Passive and Index Funds in India in 2026.” 2026. https://www.smctradeonline.com/blog/mutual-funds/best-index-funds-for-long-term-investing
- Outlook Money. “SBI Funds Management IPO 2026: Decoding the ₹9,812 Crore Public Issue and the AMC’s Global and Passive Growth Strategy.” 2026. https://www.outlookmoney.com/invest/sbi-funds-management-ipo-2026-decoding-the-amcs-growth-strategy-ahead-of-the-public-issue
- Axis Mutual Fund. “All You Need to Know About Passive and Index Funds in India in 2026.” https://www.axismf.com/mutual-fund-knowledge-centre/articles/passive-and-index-funds-in-india-in-2026