In an insightful conversation with Finance Outlook India, Chetan Kukreja, Head of Passive Research at Motilal Oswal Asset Management Company, shared his expert perspective on how India’s passive investing landscape is evolving amid growing investor awareness and innovation. With over 15 years of experience across investment banking, index development, and asset management, Chetan has worked with global institutions including Lehman Brothers (now Nomura India), the National Stock Exchange of India (NSE), and S&P Dow Jones Indices.
Drawing on this deep market expertise, he discussed how the surge in factor-based and thematic index funds is reshaping investor behavior and driving the “core and satellite” investment approach. He emphasized that passive investing in India is moving beyond traditional index funds—toward more sophisticated, rule-based products that combine cost efficiency, transparency, and diversification. Chetan also highlighted the growing need for investor education, sustainable product design, and risk-balanced strategies as passive assets continue to capture a larger share of India’s financial ecosystem. His vision underscores a future where active and passive strategies coexist harmoniously, empowering investors with flexibility, discipline, and long-term wealth creation potential.
With standard index funds gaining mainstream traction, how are innovative passive products—such as smart beta, factor-based, and thematic index funds—expanding the passive investing universe in India, and how will these options affect investor behavior?
Broad-based index funds continue to anchor the passive investing landscape in India, accounting for roughly 60 percent of passive assets under management (AUM). These funds provide investors with low-cost, diversified exposure to the market and remain the primary choice for those seeking a stable, long-term core allocation. At the same time, newer passive products are significantly expanding the investing menu. Factor-based funds, though still in the early stages, have seen impressive growth—from around Rs 3,000 crore in 2021 to approximately Rs 50,000 crore today. This growth highlights investors’ increasing appetite for rules-based, bias-free strategies that offer discipline and consistency in portfolio construction. Thematic index funds, by contrast, tend to be more cyclical. These funds tend to work best as a tactical component of a portfolio, allowing investors to gain targeted exposure to specific sectors or themes in a structured, rules-driven manner.
Overall, these innovations are shaping investor behaviour toward a “core and satellite” approach. Broad-based, low-cost funds serve as the core of a portfolio, while smaller allocations to factor or thematic funds allow investors to express specific market views or tilts, enhancing both diversification and personalization within a disciplined framework.
As passive funds capture a growing share of the assets under management (AUM), how are Indian Asset Management Companies (AMCs) and financial advisors adapting their business models? Is the industry's shift towards lower-cost products, investor education, and innovative passive strategies sustainable?
As passive funds continue to capture a growing share of assets under management (AUM), Indian Asset Management Companies (AMCs) and financial advisors are actively adapting their business models to meet evolving investor needs. AMCs are increasingly focusing on investor education and clear, simple communication, recognizing that low-cost, easy-to-understand index products can attract a wider audience, including first-time investors. Financial advisors are now incorporating passive investments as a standard part of portfolio allocation, and in many cases, investors themselves are requesting passive options, reflecting rising awareness.
Looking at sustainability, global experience offers valuable insights: in the United States, passive assets total around $18 trillion, representing over half of all fund assets, with costs even lower than in India—indicating that such models can scale effectively. In India, the passive share of industry AUM has roughly doubled from about 8 percent in September 2020 to approximately 17 percent in September 2025, highlighting a clear upward trajectory. The ongoing challenge is to continue building awareness, clarify use cases, and align products with investors’ financial goals, ensuring that the shift toward lower-cost, innovative passive strategies remain sustainable.
Given that Indian equity indices can be heavily concentrated in a few large-cap stocks, what risks does this pose for passive investors? How effectively do regulations or innovations like equal-weight indices mitigate these concentration and volatility risks in a market prone to polarized rallies?
Market-cap weighted indices in India can often be top-heavy, with a few large companies commanding disproportionately high weights. While this concentration presents a tangible risk, these larger, more mature companies can also provide stability and typically experience lower drawdowns compared with smaller stocks. Investors, however, have multiple options to manage this risk. Equal-weight and other factor-based indices distribute weights more evenly across stocks and sectors, while score-weighted strategies aim to align weights with specific, measurable attributes. Simple portfolio strategies can further help balance concentration and growth exposure—for instance, combining a broad market-cap index with an equal-weight or mid- and small-cap sleeve allows investors to capture both stability and potential upside in a more diversified manner.
Also Read: Investing in India: Legal, Tax, and Strategic Finance Insights
As the adoption of passive funds increases, particularly among millennial investors, how could this reliance on automated, index-tracking strategies affect overall market volatility and investor returns during significant market downturns or "bear phases"?
By design, passive funds aim to replicate the performance of their underlying indices, meaning both returns and volatility generally mirror the broader market. Investors can, however, select indices aligned with specific portfolio objectives—for instance, low-volatility or defensive indices, which historically tend to experience smaller declines during market stress, providing a cushion to the overall portfolio. The key lies in constructing a balanced portfolio that combines broad-market exposure with targeted factor or defensive strategies, thereby managing risk. Regular rebalancing further helps mitigate drawdowns, ensuring that the portfolio remains aligned with long-term goals even in turbulent market environments. In India’s equity markets, a balanced approach combining both active and passive strategies is increasingly essential. Passive investing offers low cost, transparency, rules-based construction, and broad market exposure, ensuring market returns with minimal decision risk. For long-term wealth creation, investors benefit from thoughtfully blending both approaches. In a market where cycles and opportunities vary across sectors, this synergy can enhance returns while managing risks effectively.
Considering the long-term underperformance of many large-cap active funds against their benchmarks, what role will active funds play in the future of wealth creation in India? Will skilled active management remain critical for outperforming in mid-cap and small-cap segments, or is the dominance of passive investing set to expand across all market capitalizations?
Active funds continue to play an essential role in wealth creation in India, complementing passive strategies rather than being replaced by them. While passive funds provide broad market exposure and cost efficiency, active management offers the flexibility to navigate market cycles, identify unique opportunities, and manage risks in ways that indices cannot.
In particular, active funds remain relevant in mid-cap and small-cap segments, where market dynamics are more nuanced and individual stock selection can significantly influence outcomes. Even in large-cap markets, skilled active managers can add value through strategic allocation, sector rotation, and tactical decision-making during periods of heightened volatility. Rather than a question of dominance, the future of investing is likely to be a balanced ecosystem where both active and passive strategies coexist. Investors benefit from using passive funds for market participation and cost-effective diversification, while selectively employing active funds to capture alpha opportunities and manage portfolio risks more precisely. This complementary approach allows for a more resilient and well-rounded wealth creation strategy across market capitalizations.
