What is This 'Passive' Approach?
For decades, the dominant investment philosophy was 'active management'. This involves a fund manager and a team of analysts actively researching and picking stocks with the goal of outperforming the market. In contrast, passive investing doesn't try
to beat the market; it aims to replicate it. Passive funds, such as index funds and Exchange-Traded Funds (ETFs), simply mirror a market index like the Nifty 50 or Sensex. If the index goes up by 10%, the fund tracking it also delivers a nearly identical return. The fund manager's job is not to pick winners but to ensure the fund’s portfolio accurately reflects the composition of the index it tracks.
Why Millennials Are Leading the Charge
The growing appeal of passive funds among young Indians is driven by several key factors. The most significant is cost. Active funds charge higher management fees, known as expense ratios, to pay for the research and trading activity. These fees, often around 1% to 2%, can significantly eat into long-term returns. Passive funds, being algorithmically managed, have much lower expense ratios. Another major draw is simplicity and transparency. The strategy is easy to understand—you are buying a slice of the entire market. This resonates with a generation that values directness and is often wary of complex financial products. The increasing difficulty for active funds, especially in the large-cap space, to consistently beat their benchmarks has also fuelled this trend. Many investors are asking why they should pay higher fees for returns that often lag the market.
The Numbers Don't Lie: A Structural Shift
This is not just a niche trend; it's a significant market evolution. The assets under management (AUM) for passive funds in India have seen explosive growth, surging from a small fraction of the industry to around 17% of the total mutual fund AUM. Projections suggest this could reach 30% within the next five years. This growth is powered by a massive influx of new, young investors. Between 2020 and 2024, the number of Demat accounts in India grew from 4 crore to 14 crore, with a large portion of these new entrants being millennials and Gen Z. Surveys show a clear generational preference, with investors under 43 showing a stronger inclination towards index funds compared to older generations. In 2024 alone, 80% of passive fund investors reported increasing their allocation.
A New Mindset: From 'Saving' to 'Growing' Money
This trend also reflects a deeper change in financial thinking. Previous generations often focused on capital preservation through fixed deposits, gold, or real estate. Today's young investors, however, are focused on wealth creation to combat rising inflation and meet long-term goals like financial independence and early retirement. They understand that money sitting in a savings account may lose value over time. Passive investing, especially through Systematic Investment Plans (SIPs), offers an affordable and disciplined way to start this wealth-building journey, with some plans allowing investments as low as ₹500 per month. This accessibility has been a game-changer, democratising market participation for a whole new generation.
Is Active Investing Over?
While passive investing's rise is undeniable, it doesn't spell the end for active funds. Many experts believe a balanced approach is best. While passive funds are becoming the core of many portfolios, active funds can still play a valuable role, particularly in less-researched areas of the market like small- and mid-cap stocks, where skilled fund managers may have a better chance of identifying undervalued companies and generating 'alpha' or excess returns. The consensus is shifting towards a model where low-cost passive funds form the foundation of a portfolio, with actively managed funds used selectively for specific opportunities. This hybrid strategy allows investors to benefit from the low costs and broad diversification of passive investing while still seeking outperformance in certain segments.
