Passive mutual funds in India are firmly establishing themselves as a key part of retail and institutional investment portfolios, with the latest data from the Association of Mutual Funds in India (AMFI) highlighting continued momentum in this space.

May 2025 marked the 55th consecutive month of net inflows into passive mutual funds, showing a clear shift in investor behaviour toward low-cost, index-linked, and strategically diversified investment options.

What Are Passive Mutual Funds and Why Are They Gaining Popularity?

Passive mutual funds include:

• Exchange-Traded Funds (ETFs)

• Index Funds

• Fund of Funds (FoFs) investing in passive strategies

Unlike active funds, passive funds replicate indices or asset baskets and are not managed by fund managers making regular buying or selling decisions. This results in lower expense ratios, higher transparency, and benchmark-mirroring returns.

With financial literacy increasing, and more investors focusing on cost-effective wealth building, passive products are steadily gaining favour in India.

Inflows in May 2025: The Breakdown

According to AMFI data:

• Net inflows into ETFs stood at ₹4,086.8 crore in May, though this was a drop from ₹19,056.66 crore in April.

• Gold ETFs reversed their previous outflow trend by garnering ₹292 crore in net inflows in May, compared to an outflow of ₹5.82 crore in April.

• The total passive fund inflows in FY25 have already touched ₹1.4 lakh crore, significantly higher than the ₹60,000 crore recorded in FY24.

This sharp year-on-year growth demonstrates how investors are becoming increasingly aligned with global trends of passive investment strategies.

New Fund Offerings Fuel Growth

The rise in passive fund inflows is being actively supported by new fund offerings (NFOs) and expanded product lines from leading asset management companies. Some notable developments:

• Zerodha Mutual Fund launched new passive fund products in FY25.

• Tata Asset Management Company (AMC) also expanded its passive offerings, targeting retail investors looking for long-term index-based exposure.

This increasing competition among AMCs is resulting in more product innovation, lower fees, and greater awareness, which in turn is accelerating passive investing adoption.

Gold ETFs Make a Comeback

Gold ETFs, which had been witnessing net outflows in previous months, registered a positive turnaround in May. Key highlights:

• May 2025 saw ₹292 crore in inflows, reversing a ₹5.82 crore outflow in April.

• The uptick suggests renewed investor interest in gold as a safe haven, possibly amid global market uncertainties or currency volatility.

Gold ETFs are considered low-risk hedges and tend to attract inflows during volatile periods, thus strengthening the hybrid and passive fund ecosystem.

Hybrid Funds: Growing as Market Buffers

While the spotlight is on passive funds, hybrid funds also gained investor traction in May 2025. These funds combine equity and debt instruments, offering a balanced exposure to risk and reward.

Categories showing significant inflows include:

• Arbitrage Funds

• Balanced Advantage Funds (BAFs)

• Multi-Asset Allocation Funds

Suranjana Borthakur, Head of Distribution at Mirae Asset Investment Managers, stated:

“While equity inflows moderated in May, the rise in hybrid categories like arbitrage and BAFs suggests investors are using these tools strategically to manage short-term market volatility.”

This points to a more informed investor base, seeking to navigate uncertainty with diversified allocations.

Valuation Concerns Shifting Flows in Equity Space

According to Vikas Gupta, CEO of OmniScience Capital:

“Indian investors are becoming more mature and are allocating rationally. Flexicap and multicap allocations continue, while small-cap funds are seeing lower inflows due to valuation concerns.”

He added that while sector-specific funds still enjoy attention, investors must stay vigilant about overvaluations, especially in hot sectors like technology, pharma, and infrastructure.

This insight shows that even within the equity landscape, investment patterns are becoming more strategic and less speculative, further underlining the importance of passive and hybrid fund categories.

Resilience Despite Equity Inflow Moderation

Historically, April and May tend to show muted equity inflows due to factors like:

• Financial year-end adjustments

• Tax planning

• Market consolidation

However, even amid this seasonal slowdown, the strength of passive and hybrid categories reflects robust investor sentiment and a maturing mutual fund ecosystem.

The mutual fund industry’s total AUM (Assets Under Management) rose to ₹72.2 lakh crore in May, up from ₹70 lakh crore in April, showing consistent growth despite equity inflow fluctuations.

What This Means for Indian Investors

• Retail investors are increasingly allocating to passive funds for long-term exposure with low costs.

• Gold ETFs and hybrid funds are being used as volatility hedges, offering diversified buffers during uncertain markets.

• Investors are also becoming more selective in equity funds, moving toward flexi-cap and multi-cap over small-cap and sectoral funds.

For first-time investors, index funds and ETFs provide a safe and efficient entry point into mutual fund investing. These funds require no active stock picking and offer broad market exposure with minimal risk of human error.

AMC Focus: Expansion and Awareness

Mutual fund houses are now:

• Increasing their passive product suite

• Enhancing digital onboarding

• Promoting investor education through webinars, tools, and SIP calculators

This effort is crucial to bring in new investors from Tier 2 and Tier 3 cities, where awareness about passive options is still catching up.

The Road Ahead: Passive is the New Mainstream

The data tells a clear story: Passive investing in India is no longer a trend — it’s becoming the norm. With cost advantages, consistent performance, and ease of understanding, passive mutual funds are set to be the bedrock of long-term portfolios for millions of Indians.

Whether it’s:

• Broad index exposure via ETFs

• Targeted strategies via sector and thematic index funds

• Risk-managed hybrid products

…investors today are more empowered than ever before to create a well-diversified, low-cost, long-term portfolio.

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