Index funds have become a popular investment choice among younger generations, especially Gen Z and Millennials, according to a recent survey conducted by Motilal Oswal Asset Management Company. The survey revealed that between 46-48% of investors under the age of 43 prefer index funds, compared to just 35% among Gen X and Baby Boomers. This shift in preference signals a growing interest in passive investing—a strategy that offers a more hands-off approach than traditional active investing.

An index fund aims to mirror the performance of a specific stock market index, such as the Nifty 50 or Sensex. For example, an investment of US$ 118.54 (Rs. 10,000) in a Nifty 50 index fund is spread proportionally across the 50 largest companies in India, including Reliance Industries, HDFC Bank, and Infosys. If the Nifty 50 index grows by 12% in a year, the value of the investment would increase by the same percentage. This simplicity and alignment with the market make index funds an attractive option for both new and experienced investors.

The growth of passive funds in India has been significant, with Assets Under Management (AUM) surpassing US$ 130.39 billion (Rs. 11 trillion) by September 2024, marking a 1.5x year-on-year increase. Much of this growth is attributed to younger investors, particularly Millennials and Gen Z, who are increasingly turning to passive investments for long-term wealth accumulation. According to Mr. Pratik Oswal, Chief of Passive Business at Motilal Oswal AMC, the appeal of passive funds lies in their low-maintenance nature. Unlike active funds, which require constant monitoring and management, passive funds track specific indices, making them a preferred choice for long-term investors who are looking for stable, steady returns without the need for regular intervention.

The survey highlighted that 74% of investors favored index funds within the broader passive funds category, and 98% of investors are aware of passive investment options. This growing awareness reflects the increasing trust in passive investing, particularly as younger investors seek to build wealth over time without excessive management fees or frequent trading. The preference for sectoral indices—which focus on specific sectors like technology, banking, or healthcare—was also notable, with younger and middle-aged investors showing a greater affinity for these funds compared to commodities or smart beta funds.

A major insight from the survey was that 82% of passive fund investors plan to hold their investments for the long term, with the majority intending to keep their funds for three years or more. This long-term outlook aligns with the general philosophy of index funds, which are seen as a solid foundation for building wealth over time with less frequent market fluctuations than actively managed funds. Furthermore, 40% of passive fund investors allocate between 10-30% of their portfolios to index funds, and a significant 80% of these investors have increased their allocations to passive funds in the past year.

In terms of future trends, the survey found that investors are anticipating a 15% increase in their allocation towards passive funds in the coming years. As a result, the Indian market is likely to see continued growth in the passive investment sector, with more investors recognizing the benefits of diversified, low-cost, and hands-off investment strategies.

In conclusion, the rising popularity of index funds and other passive investment vehicles reflects a broader shift in investment strategies in India, particularly among the younger generation. These funds provide an accessible, efficient, and cost-effective way for investors to grow their wealth over time. As the market for passive funds continues to expand, AUM will likely keep growing, and more investors will be drawn to this approach as a viable alternative to active investing.

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