Nearly 70% of Large-Cap Investment Flows Shift Passive as India’s ₹15 Lakh Crore Asset Boom Reshapes Market Strategy

Nearly 70% of Large-Cap Investment Flows Shift Passive as India’s ₹15 Lakh Crore Asset Boom Reshapes Market Strategy​

Passive investing has evolved rapidly in the Indian market, moving far beyond simple Nifty or Sensex index funds. The segment is now a major force, with assets in passive products approaching ₹15 lakh crore and accounting for nearly one-fifth of the mutual fund industry's total assets. This boom reflects a maturing investor base that now accesses diverse tools, from smart-beta strategies to sectoral and thematic ETFs.

Pratik Oswal, Chief of Passive Business at Motilal Oswal AMC, states that this shift is driven by multiple factors, positioning passive investing as one of the fastest-growing areas in finance. The movement represents a significant shift away from relying solely on active management across the entire market landscape.

Institutional Drive Fuels Massive Passive Growth​

The rise of passive products has been strongly propelled by institutional participation. Pension funds and large institutions are increasingly utilizing index funds and ETFs to manage long-term liabilities through equities.

Beyond organized institutions, HNIs (High Net Worth Individuals) and retail investors have enthusiastically embraced the segment over the past six years. This growth is phenomenal, with passive assets demonstrating a CAGR of approximately 80–100 percent during this period. Ten years ago, index funds constituted less than 1 percent of the mutual fund industry's assets; today, that share nears 18 percent.

Simplified Access and Portfolio Expansion Define Passive Investing​

A key contributor to the passive boom is simplicity. Active funds require investors to select both a category and a specific fund manager. In contrast, passive funds only require the selection of a desired category or index exposure.

The universe of available passive products has expanded dramatically since traditional benchmarks. Investors can now access multi-cap, small-cap, sectoral, international, commodity-based ETFs, and thematic indices. Motilal Oswal AMC currently manages over 70 such passive products.

Performance Benchmarks: How Passive Compares to Active​

Markets are becoming increasingly efficient, making consistent outperformance challenging for active fund managers. Globally, passive funds outperform more than 90 percent of active managers over long durations in the US market, where passive assets account for roughly 60 percent of the mutual fund industry.

In India, while we are not at that level, broad-market indices already outperform approximately 60–70 percent of active managers, especially within the large-cap segment. Experts stress that this is not an active versus passive contest; a balanced portfolio incorporating both strategies remains advisable. A comfortable allocation for passive strategies in a balanced portfolio can be between 20 and 30 percent.

Strategic Portfolio Construction: Mixing Passive and Active Strategies​

The data confirms a strengthened case for passive large-cap funds, as approximately 60–70 percent of incremental large-cap flows have favored passive products over active ones during the past four to five years. This trend is linked to increased trust in market indices.

However, portfolio construction requires nuance across asset classes. Active management retains a vital role in mid-cap and small-cap investing segments because these markets are currently less efficient. A suggested disciplined approach involves using passive strategies for large caps while allocating active strategies to mid and small caps.

Thematic Investing and Global Exposure Risks​

Passive investing has moved past being merely about Nifty or Sensex tracking. Today's investors demand targeted exposure, whether it be through defence, manufacturing, clean energy, or momentum sectors.

Motilal Oswal AMC highlights the launch of the BSE Clean Environment Index Fund as a commitment to a multi-decade investment theme. This theme extends beyond renewable power to include electric vehicles and waste management solutions, recognizing that renewable energy economics are improving dramatically.

A critical caution exists regarding international ETFs trading at steep premiums relative to their Net Asset Value (NAV). Due to regulatory constraints limiting new units, these instruments often trade at significant elevated premiums. Investors are advised to exercise extreme care and consider the Liberalised Remittance Scheme (LRS) for global exposure instead of purchasing such high-premium products.

Ideal Portfolio Guidance: Focus on Time and Diversification​

For a first-time investor with a 10-year horizon, multi-asset investing is the strongest advice. A portfolio should judiciously combine equities, fixed income, international exposure, and precious metals. Gold and silver can provide valuable diversification benefits.

The US market should form the core of most international portfolios, given that it accounts for roughly 60 percent of global market capitalization. While emerging markets offer complementary opportunities, investors must refrain from constantly shifting allocations based on short-term performance or recent country-specific rallies.

Ultimately, the most critical advice is to start early and maintain commitment to the investment plan. Wealth creation relies on compounding, which demands time. Investors are encouraged to keep their portfolios simple, dedicating only a small portion for speculation while allowing long-term wealth-creating assets to do the heavy lifting.