Index funds: why more Indians are skipping active funds

What changed

An index fund buys every stock in an index, in the index's proportions, and does nothing else. There is no fund manager choosing stocks, so there is no star to back and no one to blame. For a long time Indian investors found that unappealing. That has changed quickly.

Of the 377 index funds in our data with a Direct plan, Growth option and a current NAV on 1 October 2026, only 55 have a record that starts before 2022. The other 322 launched in 2022 or later.

The count includes debt index funds, such as target-maturity funds that track a basket of government bonds, as well as equity index funds. Funds that existed before 2013 show 2013 here, because that is when Direct plans began.

How much money they hold

Launches are one thing; money is another. AMFI's quarterly AUM disclosures show equity index funds (excluding ETFs) holding about ₹2.09 lakh crore in April–June 2026, up from about ₹1.97 lakh crore in January–March. For scale, active large-cap funds held about ₹3.96 lakh crore in April–June, slightly down from ₹4.03 lakh crore the quarter before.

So index funds are still smaller than the single active category they most compete with. But they are no longer a niche, and they were growing in a quarter when active large-cap assets were not.

The split between equity and debt index funds here is ours, made from scheme names, so treat the equity figure as approximate.

Reason 1: the fee is small and known

Expense ratios are from AMFI's disclosures for 30 September 2026. The cheapest Nifty 50 index fund charged 0.10% on its Direct plan.

The fee is taken from the fund every day whether the fund does well or badly. A typical active large-cap fund has to beat the market by about 0.8 percentage points a year just to match a Nifty 50 index fund. Some do; the question is whether you can pick them in advance. The Direct vs Regular calculator shows how much a fee gap compounds to over your own holding period.

Reason 2: you can't pick the wrong manager

Active funds in the same category produce very different results. Over five years to 1 October 2026, active large-cap funds returned between 5.00% and 11.94% a year. That seven-point range is the risk of choosing a fund. An index fund gives up the top of the range in exchange for never landing at the bottom.

It also removes some events that an investor in an active fund has to watch for: a fund manager leaving, a change in the fund's style, or a fund growing so large that it struggles to buy what it wants. Our guide on when a fund manager changes covers what to look for in active funds.

Reason 3: it is easy to understand

You can check what a Nifty 50 index fund owns without reading its factsheet: it owns the Nifty 50. Its return should be close to the index's, and the shortfall, the tracking difference, is mostly the fee. Our study of Nifty 50 index fund tracking found the funds trailing the index by a fraction of a percentage point a year over five years.

That simplicity matters for a first-time investor, and for anyone who does not want to review fund managers every year.

Where the case is weaker

Index funds are not automatically the better choice, and the recent Indian numbers are a reminder.

• Active large caps have done well lately. Over five years to 1 October 2026, 25 of 27 active large-cap funds beat the median Nifty 50 index fund's 6.01% a year; over ten years, 17 of 22 beat its 10.96%. The details, and the reasons that may not last, are in active vs passive investing: which wins in the long run.
• An index can be concentrated. The Nifty 50 is weighted by company size, so a few banks and large companies make up a big share. When those fall, the index fund falls with them. Its median one-year return to 1 October 2026 was −8.90%.
• Not every index fund is cheap or plain. Some track narrow "smart beta" or thematic indices with higher fees and more concentrated portfolios. A fund that tracks a narrow index is still a narrow bet.
• Small, new funds can track badly. A fund with little money may trail its index by more than the fee. Look at tracking difference over at least a year before choosing.

Choosing an index fund

If you decide an index fund suits you, comparing them is simpler than comparing active funds, because funds tracking the same index should give nearly the same return. The order of what to check:

1. The index. Decide whether you want the Nifty 50, a broader index, or a mid-cap or small-cap one. That choice matters far more than which fund house runs it.
2. The expense ratio on the Direct plan.
3. Tracking difference over one and three years, compared with other funds on the same index.
4. Fund size, as a rough guide to how easily the fund can buy and sell.

You can filter index funds by cost and return on WealthTicker, and the index funds and ETFs guide explains how they differ from exchange-traded funds.

This post is for education only and is not investment advice. Past returns do not predict future returns.