Should You Bet On Passive Or Active Mutual Funds - What Works For Indian Retail Now?

Passive funds are fast becoming the default "core" for Indian retail portfolios in 2025, especially in large-cap and broad-market exposure, while active funds work best as a selective "satellite" in less efficient segments like mid- and small-caps. The data clearly favors a "passive core + active satellite" approach over an ideological passive-versus-active debate.​

India's mutual fund AUM crossed Rs 79.88 lakh crore as of October 31, 2025, up from Rs 13.24 trillion in 2015 (6x growth) and Rs 28.23 trillion in 2020 (nearly 3x in five years), powered by record SIP inflows of Rs 29,529 crore from 9.45 crore accounts.

Passive funds (index funds and ETFs) surged to ~Rs 13.31 lakh crore, up 21% year-on-year and now ~17% of total AUM, a six-fold jump since 2019. Equity ETFs, low-cost index funds, and gold/silver ETFs now draw retail SIP flows rivaling active strategies, with B30 cities contributing 18.5% of AUM (up from 7-8% in FY12). Retail and HNI AUM share hit 61% by March 2025, signaling deepening participation beyond metros.​

Performance Reality Tilts Passive

"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.

Example: A Rs 10,000 monthly Nifty 50 index SIP over five years yields market-linked returns with minimal monitoring, often matching active large-caps post-fees minus volatility drag.​

Active Alpha in Inefficient Segments

Mid- and small-caps remain active territory: SPIVA notes majority short-term outperformance, with top funds delivering 5-7% annualized alpha over three to five years per Value Research/Morningstar.

"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.

AMFI data confirms: small-cap inflows hit Rs 2,000 to Rs 4,000 crore monthly in 2024-25 despite froth, while broad equity funds captured 64% of Q2 2025 flows.​

U.S. markets (50%+ passive AUM) contrast India's hybrid: large-caps efficient like the West, small-caps emerging-market style with under-researched opportunities.​

Practical Framework for Retail

Core (50% to 80%): Nifty 50/500/Next 50 index funds + debt passive via SIPs for beta capture; direct plans now 48% of AUM reflect cost awareness.​

Satellite (20% to 40%): 1-2 mid/small-cap or flexi active; screen for top-quartile five-year returns vs index/peers, swap if bottom-half lagging.​

Discipline first: Time in market drives 80%+ outcomes amid Rs 16.25 lakh crore SIP AUM; reassess satellites every 2years to 3 years to cut cost drag.​

"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.

The Biggest Mistake Retail Investors Make in Mutual Funds-And How to Fix It

Choosing between active and passive mutual funds really comes down to your comfort with risk and what you're trying to achieve. Active funds work for investors who are okay taking higher risk in the hope of better-than-market returns. But they do depend on the fund manager's skill and come with higher costs.

"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.

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.

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