Passive funds: Survey finds 80% investors hiked passive investment in one year

Passive fund adoption is on the rise, a survey conducted by Motilal Oswal AMC revealed, adding that 80% of investors have increased their allocation towards index funds and ETFs in the past year. Passive funds have seen a significant growth in assets under management (AUM), surpassing Rs 11 lakh crore by September 2024. This marks a 1.5 times increase compared to the previous year. 

The survey also found that 40% of investors are now allocating 10-30% of their portfolios to passive funds.

Of the two main passive fund categories, index funds are more popular among the 3,300 respondents, with 74% having exposure to these schemes. In comparison, only 31% of respondents had invested in ETFs.

"As passive funds continue to reshape the financial landscape, their appeal among investors and distributors has reached unprecedented levels. Fuelled by favourable regulatory support, rapid technological advances, and a growing awareness among Indian investors, passive funds have experienced remarkable growth, with Assets Under Management (AUM) soaring from Rs 7 lakh crore in September 2023 to over Rs 11 lakh crore by September 2024—a striking 1.5x increase in just one year," the report stated.

Based on the survey results, sectoral funds emerged as the preferred choice within passive fund categories for investors. The study revealed that investment choices were influenced by social media and individual research efforts.

“India’s mutual fund industry is witnessing a strong growth trajectory, with both active and passive strategies playing vital roles in portfolio building. While passive funds have seen accelerated adoption — especially among younger investors seeking simplicity and cost efficiency—active funds remain indispensable for those seeking to capture opportunities through in-depth market insights and strategic expertise. At Motilal Oswal AMC, our goal is to provide a suite of products that aligns with varied investor goals. As our industry evolves, we will keep launching new products supporting wealth
creation through active and passive investments,” said Prateek Agrawal, MD & CEO, Motilal Oswal Asset Management Company.

Key Investor Insights:

Awareness and Understanding: A significant 98% of mutual fund investors are familiar with passive funds, yet a majority (58%) have a limited understanding of them. Index funds are the most popular choice, with 74% of investors opting for them (43% exclusively choosing index funds, while 31% investing in both ETFs and index funds).

Investment Choices by Demographics: Gen Z and Millennials show a higher preference for index funds, with 46-48% of investors under 43 favoring them, compared to 35% among Gen X and Boomers. Indian sectoral indices are a preferred option, particularly among younger and middle-aged investors, over commodities and smart beta funds. These insights provide valuable information on the investment preferences and awareness levels of mutual fund investors across different demographics.

Investment Strategy: Social and self-research significantly influence passive fund investors, while active investors rely more on friends and financial advisors. Passive fund investors tend to review their portfolios quarterly, showing a more relaxed approach compared to active investors who prefer monthly reviews. 82% of investors have a long-term investment horizon for passive funds, planning to hold for more than three years.

Portfolio Management: 40% of passive fund investors allocate 10-30% of their portfolios to passive funds, with 80% of investors increasing their allocation in the past year, especially among Gen Z.
On average, investors hold 8-9 funds, with 71% holding 1-10 passive funds.

Future Investment: Investors anticipate a potential 15% increase in their allocation towards passive funds in the near future.

“Passive fund as an investment avenue has growth 1.5X in last one year cementing the awareness among the mutual fund investors. Interestingly Index fund has been a popular choice among the Millennials and Gen Zs compared to Gen X and Boomers. Moreover, the approach is dramatically different from active with relaxed style of investing keeping long-term investment horizon where the holding period is more than three years. The future for passive fund is anticipated to be great as our survey reports a potential 15% increase in allocation towards passive funds. Overall, 2024 has been a great year for passive funds and we anticipate continuing the momentum with strategic allocation advisory,” said Pratik Oswal, Chief of Passive Business, Motilal Oswal Asset Management Company.