Passive Funds and Active Funds in India 2025: A Balanced Strategy for Retail Investors

Indian retail investors are shifting towards portfolios where passive funds form the base and active funds play a supporting role. This blend aims to balance costs, performance, and risk. Large-cap exposure now usually comes through index strategies, while selective active funds target mid-cap and small-cap segments, where pricing gaps and research shortages can still create alpha.

Choosing between active and passive mutual funds depends on risk tolerance, time frame, and return expectations. Active funds appeal to investors who accept higher risk and reliance on fund manager skill. Passive funds attract investors who want predictable rules, lower costs, and less monitoring, especially for core holdings that track large indices.

India’s mutual fund industry assets under management reached Rs 79.88 lakh crore on October 31, 2025. This compares with Rs 13.24 trillion in 2015 and Rs 28.23 trillion in 2020. The growth links closely to record systematic investment plan inflows of Rs 29,529 crore, spread across 9.45 crore SIP accounts across the country.

Passive funds, including index funds and exchange-traded funds, now command around Rs 13.31 lakh crore. That marks a 21% year-on-year rise and roughly 17% of total industry AUM. Their share has increased about six times since 2019, helped by low fees and simpler communication, especially for first-time mutual fund users from beyond major metros.

Equity ETFs, low-cost index funds, and gold or silver ETFs now attract SIP flows similar to many active funds. Cities beyond the top 30, often called B30, contribute 18.5% of mutual fund AUM. This is up from about 7% to 8% in FY12. Retail and HNI money formed 61% of total AUM by March 2025, reflecting broader participation.

The cost advantage for passive funds and active funds is large when compounded. Expense ratios for passive products usually range between 0.05% and 0.5%. Direct plans of active funds often charge between 1.5% and 2.5%. Over a 10-year to 15-year SIP period, this gap can create 15% to 20% higher final wealth for low-cost passive investors.

Performance trends of passive funds and active funds

"SPIVA India Mid-Year 2025 shows 66% of large-cap active funds underperformed benchmarks over H1, rising to 70% to 80% over five to ten years; 74% to 84% lag over a decade across equity categories. Costs amplify this: passive expense ratios average 0.05% to 0.5% versus 1.5% to 2.5% for active direct plans, compounding to 15% to 20% higher terminal wealth over 10 to 15 years via SIPs," said Rohit R Chauhan-Founder-Ingood.

An illustration often given is a Rs 10,000 monthly SIP in a Nifty 50 index fund for five years. Investors receive market-linked performance with limited need for tracking or timing calls. After fees and tax, many such portfolios end close to large-cap active categories, especially when volatility drag impacts frequent portfolio churn.

The data indicates Indian large-caps behave like developed markets, where beating indices is difficult. Hence, passive funds and active funds are increasingly used differently. Index funds dominate large-cap allocations, while active strategies focus on parts of the market where valuation gaps or liquidity issues are higher and research coverage is thinner.

Where passive funds and active funds both have a role

Mid-cap and small-cap segments remain fertile for skilled active managers, at least for now. SPIVA studies highlight more short-term outperformance here than in large caps. Value Research and Morningstar show several funds delivering 5% to 7% annualised alpha over three to five years, though this comes with sharper drawdowns and behavioural pressure.

"Flexi/multi-cap funds rotate during volatility in 2020, 2022, 2023 corrections saw them cushion downside better than indices by raising cash or shifting defensives. Example: Top-quartile small-cap active funds like Edelweiss Mid Cap generated 1.4x - 1.8x Nifty Smallcap 250 returns over five years, though with higher drawdowns requiring discipline," commented Rohit R Chauhan-Founder-Ingood.

Association of Mutual Funds in India data shows small-cap schemes kept receiving between Rs 2,000 crore and Rs 4,000 crore each month during 2024-25. This occurred despite concerns around frothy valuations. Broader equity schemes accounted for 64% of net inflows in the second quarter of 2025, underscoring sustained interest in growth-oriented mutual fund categories.

Portfolio framework using passive funds and active funds

Many advisors propose a simple core-satellite structure for Indian retail investors. The core, often 50% to 80% of the portfolio, typically uses Nifty 50, Nifty 500, or Nifty Next 50 index funds. Debt index funds or target maturity products can sit alongside them. Direct plans now comprise 48% of AUM, showing improving cost awareness.

The satellite part, usually 20% to 40%, holds one or two focused active funds. These may be mid-cap, small-cap, or flexi-cap schemes. Investors are advised to pick top-quartile performers on five-year records against benchmarks and peers. Funds slipping into the bottom half for sustained periods can be replaced after a structured review.

Discipline remains central to this use of passive funds and active funds. Industry SIP AUM stands near Rs 16.25 lakh crore. Evidence suggests more than 80% of long-term outcomes depend on staying invested and avoiding panic exits. Investors can reassess active satellites every two to three years to contain costs and control style drift.

Metric	2015	2020	2025
Total mutual fund AUM	Rs 13.24 trillion	Rs 28.23 trillion	Rs 79.88 lakh crore
Passive funds AUM share	Low base	Rising	~17% of AUM
SIP accounts	Base FY12	-	9.45 crore

Investor behaviour towards passive funds and active funds

"This blend harnesses passive efficiency (large-cap scale) and active edge (mid/small-cap dispersion) as retail unique investors hit 5.43 crore. With SIP accounts up 19x to 9.5 crore since FY12, hybrid portfolios will define 2025 success in India's maturing market," Rohit R Chauhan further added.

Global comparisons highlight India’s hybrid path for passive funds and active funds. In the United States, more than 50% of industry AUM sits in passive products. Indian large-caps now mirror this efficiency, but domestic small-caps still resemble emerging-market territory, with uneven disclosure and wider differences between companies.

"Passive funds like index funds and ETFs simply mirror an index, so they're low-cost, predictable, and easy to understand. They suit investors who prefer steady, no-surprise growth," said Navy Vijay Ramavat, Managing Director, Indira Securities.

"For most retail investors today, a mix of both tends to work well: use passive funds as your stable base, and add active funds only where you see strong potential," Navy Vijay Ramavat further recommended.

Key lesson from passive funds and active funds debate

The biggest error many retail investors make is treating passive versus active as an all-or-nothing choice. "Passive vs active is a false debate. Indian retail investors need both. Passive funds keep costs low and work well for large caps, but only active funds give you a real chance of outperforming the benchmark, particularly in the mid and small cap space. Your allocation should reflect your risk, your goals, and your comfort with market volatility, not what is trending."

For finance-focused readers, the core message is data driven. Passive funds dominate efficient large-cap exposure, while focused active funds still matter in mid-cap and small-cap spaces. With mutual fund AUM, SIP contributions, and investor counts all rising, blended portfolios built around discipline, cost control, and periodic review are shaping retail investing outcomes in 2025.