Overview
- Index funds grow in popularity in India due to lower costs and steady market-matching returns.
- Actively managed mutual funds lag benchmarks, especially in large-cap and mid-cap categories.
- A balanced portfolio in 2025 often combines index funds with selective active mutual fund themes.
In India, the popularity of investing has surged like never before. More students, young professionals, and families are exploring ways to grow their savings. Two standard investment options today are mutual funds and index funds.
Both funds gather money from individuals and invest it in the stock market, but they operate in very different ways. Let’s explore the distinctions between these funds and their impact on the market.
Mutual Funds and Index Funds
A mutual fund is handled by a manager who studies the market and selects shares or bonds. The aim is to outperform the overall market. An does not try to beat the market. It simply follows a list of companies like the Nifty 50 or the Sensex. When the index rises, the fund increases. When the index falls, the fund falls.
Mutual funds can be compared to a teacher who handpicks the best students for a competition, while an index fund is like sending the entire class to represent the school. The fund obtains everything that the class achieves.
Cost Difference
Actively managed mutual funds cost more as managers are paid to research and trade. In India, these costs typically range between 1 percent and 2 percent of the investment annually. Index funds are cheaper, usually between 0.2 percent and 0.5 percent. The lower costs have a significant impact when money is invested over many years.
Performance in 2025
In early 2025, only about 26 percent of equity mutual funds performed better than their benchmarks. Large-cap funds, which invest in the biggest companies, did not perform better than the index at all in January.Mid-cap funds also lost their shine. Only 18 percent of them outperformed the benchmark in three, five, and ten-year periods ending in May 2025.
Passive funds, which include index funds and ETFs, showed strong growth during the same period. They now account for nearly 17 percent of India’s total mutual fund assets, which is a sharp jump from just a few years ago.
Rise of Passive Funds
In the financial year 2025, passive funds attracted over Rs. 1.4 lakh crore in inflows, more than double what they received in the previous year. The total money invested in passive funds crossed Rs. 12 lakh crore by May 2025.
Large companies are launching new index funds. Jio BlackRock, for example, received approval in 2025 to introduce four passive funds that focus on mid-cap, small-cap, next 50, and government bonds. This shows how much demand is growing in this category.
Why Passive is Growing
are growing as they are cheaper, easier to understand, and more reliable in the long run. They do not depend on the skill of a manager, but still give exposure to the market. For beginners, this has become a safe choice.
Active mutual funds are still necessary. They are often chosen for areas like small-caps or special themes where a skilled manager can still make a difference. Some investors also prefer them when looking for higher but riskier returns.
Retail Investors in India
Retail investors are shaping the market in India today. In July 2025, equity mutual funds received record inflows of Rs. 42,702 crore, even as foreign investors pulled money out.SIPs touched a new high of 91 million active accounts. Mutual funds now form about 6 percent of household financial savings, compared to less than 1 percent more than ten years ago.
This indicates that investing has become a habit for many Indian households, nearly on par with keeping money in a bank account.
Investor Fit: Which Is Better?
Index funds are ideal for:
- Investors seeking low-cost, long-term growth through broad market exposure
- Beginners or those seeking passive, hassle-free investments
- Those prioritizing simplicity, transparency, and tax efficiency
Active mutual funds may suit:
- Investors who believe skilled managers can navigate market inefficiencies
- Those willing to pay higher fees for potential outperformance
- Individuals desiring strategic, hands-on management, especially in niche sectors
Conclusion
It is clear that a trend is emerging in India: index funds are becoming the preferred investment choice for their lower costs and ability to match market performance. While active mutual funds continue to hold relevance, particularly in smaller sectors and specific themes, they are increasingly under pressure when compared to index funds. A balanced approach is more prudent, combining index funds as a general safety net with active mutual fund investments for targeted opportunities.