Why do passive mutual funds outperform active funds? When dealing with mutual funds investment in India, most people think of professionally managed funds where fund managers pick stocks hoping to outperform the market. But times are changing just like the market.
An unseen transformation is in progress – passive mutual funds, which is gaining its popularity and challenging the dominance of active funds.
What Are Passive Mutual Funds?
Passive mutual funds simply track down a market index like the Nifty 50 or Sensex. They do not try to beat the market, instead they match the index’s performance at a much lower cost.
Why do passive mutual funds outperform active funds?
For many years, active funds dominated the Indian stock market because investors trusted fund managers to provide better returns. But data shows that many active funds fail to beat their milestones consistently. Here is the reason why passive funds are quietly becoming the smart choice:
- Low Cost: Passive funds have an expense ratio as low as 0.1% to 0.5%, whereas active funds have expense ratio of 1.5% to 2%. Lower expense ratio means more money stays invested for you.
- Transparency: You always know which stocks your passive fund holds, as it tracks down the index’s performance like the Nifty 50 or Sensex.
- Consistent Returns: While active funds may fall short, passive funds always match the index returns by taking away minimal costs.
- Global Trend: Globally, passive investing dominates and now the same shift is visible in India as well with record inflows into index funds and ETFs.
Growing Numbers Back the Trend
As per the AMFI (Association of Mutual Funds in India), the AUM (Assets Under Management) of passive funds in India crossed ₹8 lakh crore in early 2025, which is a massive jump of over 40% in just two years. NSE and BSE continue to launch more index and sector-specific funds, which offers wider choices to retail investors.
Who Should Consider Passive Funds?
Passive mutual funds are ideal for:
- Beginners who want to start simple without taking much risk.
- Long-term investors who are looking to build their wealth steadily.
- Investors who are looking for the best mutual fund portfolio strategy for 2025 with less monitoring.
How to Choose the Right Passive Fund
While exploring how to choose the right mutual funds in India, make sure to keep these point in mind:
- Low Tracking Error: Choose funds that track down the index closely.
- Expense Ratio: Lower is the expense ratio, higher will be your returns.
- Fund Size: Keep in mind that larger funds often have better liquidity.
- Reputation: Always choose the trusted AMCs with a good track record over the past 5 to 10 years. You can verify AMCs’ data on SEBI’s mutual fund listing.
Key Passive Funds Gaining Popularity
Some popular passive mutual funds options to choose in India are:
- Nifty 50 Index Funds
- Sensex Index Funds
- Nifty Next 50 Funds
- Nifty Bank ETFs
- Sectoral ETFs like Nifty IT or Nifty Pharma
Conclusion
Next time you consider mutual funds investment in India, keep in mind that passive funds can be a smart, cost-effective way to ride India’s growth story. They may not promise exciting returns, but they silently deliver market-matching performance with low cost, which is hard to beat.
So, even if you’re planning your best mutual fund portfolio strategy for 2025 or deciding how to choose the right mutual fund in India, don’t ignore passive investing.