The Indian mutual fund scenario has shifted noticeably over the past few years. At the end of 2025, investors are no longer limited by a lack of options. From actively managed schemes to index funds and ETFs, the choices available today are far wider than they were before. Despite this expansion, one question continues to surface. Should investors rely on active mutual funds or invest in passive funds?
This question matters more today than it did earlier. Costs are no longer hidden in fine print, and performance data is easy enough for anyone to look up. Long-term investing, too, has moved into the mainstream. With SIPs , index funds and ETFs now widely available, the choice between active and passive funds can significantly influence outcomes over longer periods.
What Are Active and Passive Funds?
Active funds aim to beat the market. They are managed by professional fund managers. These managers research companies, track trends and take investment calls based on data and judgment. The goal is simple. Generate returns higher than the benchmark. But this approach comes with higher costs. Expense ratios for active equity funds in India usually range between 1% and 2% annually.
Passive funds work very differently. They do not try to beat the market. They simply replicate a benchmark index, such as the Nifty 50 or the Sensex. Index funds and ETFs are the most common passive products. Since there is no active stock selection, costs remain very low. Some passive funds charge expense ratios as low as 0.05%.This difference in cost becomes critical over time.
Why Passive Funds Are Growing Faster in India
Passive investing was once ignored in India. That is no longer the case. By 2025, passive funds have become a significant part of the mutual fund industry.
- Passive funds now manage over ₹12 lakh crore in assets, accounting for roughly 17% of total mutual fund AUM in India
- Just a few years ago, this number was below 3%
- More than 100 passive funds were launched in 2025 alone
ETF inflows also hit record levels. In April 2025, ETFs saw inflows of ₹19,056 crore, the highest ever for a single month This growth reflects a shift in investor mindset. Indian investors are becoming cost-conscious. They are also thinking more long term.
Performance Data: What Actually Worked in 2025
Large-Cap Equity Funds
Large-cap stocks are heavily researched. This makes consistent outperformance difficult. SPIVA India data shows that in 2025, around 65–66% of active large-cap funds underperformed their benchmark indices This means most investors paid higher fees only to receive market-level or lower returns.
In such categories, passive index funds tracking the Nifty 50 or Sensex performed better on a net basis.
Mid-Cap and Small-Cap Funds
The story changes slightly outside large caps. Mid-cap and small-cap markets are less efficient. Not all stocks are tracked equally. Here, skilled fund managers still have room to add value.
In 2025 ,several active mid-cap and small-cap funds outperformed their benchmarks, though results varied widely. However, this outperformance was not consistent across all funds.
Short-Term vs Long-Term Returns
Active funds sometimes shine during volatile markets. They may protect downside better in corrections. This helps in shorter time periods. But over longer horizons, costs catch up. Multiple studies show that over 10–15 years, passive funds often deliver equal or higher returns after fees, especially in large-cap categories
Costs Matter
Costs look small on paper. But they compound silently. An expense ratio difference of even 1% per year can reduce final wealth significantly over 20 or 25 years. Passive funds in India often operate at a fraction of the cost of active funds. This gives them a structural advantage. SPIVA and AMFI data consistently show that lower-cost funds have higher chances of long-term success, even if returns before costs look similar
This is one reason why passive funds are outperforming more often in India now.
Where Passive Funds May Fall Short
Passive investing is not perfect. It comes with its own limitations.
- Passive funds cannot avoid market downturns
- They will fall exactly as much as the index falls
- Some thematic and sectoral indices may have higher volatility
In certain segments, especially niche strategies, active funds may still be better suited. Debt passive funds have also seen slower adoption after tax changes . This has reduced their post-tax attractiveness for some investors.
What Worked Best for Indian Investors in 2025
For most Indian investors in 2025:
- Passive funds performed better in large-cap equity categories
- Active funds still had relevance in mid and small caps
- Long-term SIP investors benefit more from low-cost passive strategies
This has led to the rise of the core–satellite approach. In this strategy, passive funds form the core portfolio and select active funds act as satellites for potential extra returns.
This approach balances stability with opportunity. It also reduces the risk of consistent underperformance.
