All You Need to Know About Passive and Index Funds in India in 2026
Passive investing has quietly earned a prominent space in Indian portfolios. This surge in adoption of passive funds is because they solve two real investor needs: simplicity and cost efficiency.
As of Dec 2025, according to AMFI, passive funds in India managed assets worth over ₹14 lakh crore, and the reasons behind this big number are familiar: investors want exposure that does not demand constant decision-making, fits small budgets early in careers, and works well for long-term goals. The popularity of SIPs in India definitely reinforces this.
Source: Value Research
How Passive Investing Works
A passive fund tracks a specific benchmark index. The fund holds the same companies the index holds in the same proportions. When the index is updated, the fund follows suit. There is no attempt to forecast which stock will rally next month or which sector will dominate the quarter. The approach is simple: follow the market’s direction by staying aligned with it, not by trying to beat it.
Index Funds vs ETFs
Index funds and ETFs are both passive investing tools as they both track indices. The difference lies in their structure.
• Index Mutual Funds: Index mutual funds track Indian benchmarks like the Nifty 50, Sensex, Nifty Midcap 50, or Nifty Smallcap 50. These funds transact at end-of-day NAV, which makes them predictable in execution and potentially well-suited for systematic investment plans (SIPs), a dominant investing mode among Indian investors. Expense ratios for index funds typically are lower, depending on the fund house and assets under management.
• ETFs: ETFs track indices too. However, they trade on the stock exchange like shares. ETFs require a demat account and incur brokerage and platform charges in addition to expense ratios. They can be bought or sold throughout market hours, providing flexibility and intra-day liquidity, especially for commodity-linked passive products such as gold and silver ETFs.
It must be noted that no passive fund tracks an index perfectly. There are small deviations and these are expected, which is measured by tracking error. In India, large-cap equity index funds usually might show lower tracking error because liquidity is high. Small-cap indices can show a slightly higher tracking error when funds rebalance. This is not always because the strategy is flawed, but because stock liquidity impacts execution timing.
Why Passive and Index Funds Matter in 2026
• Growth of passive investing: By 2025, passive products in India were no longer a side category. As per AMFI data as of Dec 2025, their assets crossed ₹14 lakh crore, and as per same data their share of industry AUM expanded to 17% . Even though a large portion of it comes from EPFO, but there has been meteoric rise in remaining portion which reflects how investors are building their portfolios now. Consistent passive flows despite volatility: Even though Indian indices trailed global markets, as per an analysis by ETMutualFunds as of Jan 2026 select passive funds delivered upto 76% returns in 2025. This was mostly driven by international and sector index exposure that captured the momentum.
• Diversification within passive categories: Equity index folios grew over the years and precious-metal ETFs such as gold and silver saw strong folio expansion too. This indicates how participation is widening across asset classes and offering diversification within portfolios.
Who Are These Funds for?
Investors who:
• are seeking broad market exposure without frequent stock selection or sector calls.
• are comfortable investing for a period of 5 years+ in case of equity index funds.
• who want low-cost, transparent portfolios that replicate defined indices.
• looking for investing in niche segments in passives category.
These funds may not suit short-term traders, leveraged strategy users, or high-frequency market participation styles. But for most long-term goals, they add a fundamental layer to the portfolio.
Conclusion
Passive investing is not about picking a side in the active vs passive debate but about picking what works for your timeline, budget, and involvement capacity. Index funds reward continuity and patience and don’t demand daily calls or constant tracking. You do not need to sound like a market expert to invest like one.
You need to invest regularly, keep costs low, and let the market’s overall direction do the work for you over time.
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