Why Motilal Oswal's Raamdeo Agrawal believes passive investing will gain ground

Raamdeo Agrawal built a fortune over the past three decades, starting as a sub-broker and going on to build Motilal Oswal Financial Services as a large stock market broker, a mutual fund, and an alternative asset manager along with co-founder Motilal Oswal.

However, Agrawal, the chairman and co-founder of Motilal Oswal Financial Services believes passive investing will increasingly gain ground in India, just as it took off in developed markets like the United States.

In the last few years, a number of fund houses, including Motilal Oswal AMC, have launched a bouquet of passive schemes, including exchange-traded funds (ETFs) and index funds. 

As the name suggests, index funds are low cost mutual fund schemes that essentially track an underlying index like Sensex or Nifty. There are also schemes that track broader indices like the Nifty 500.

 "It allows you to invest in an entire market, an entire country, an entire category, without any hassle. And the lowest possible cost," points Agrawal. 

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According to data from Indiapassivefunds.com, overall assets under management of passive funds stood at Rs 14.77 lakh crore, with ETFs accounting for Rs 11.45 lakh crore and index funds at Rs 3.32 lakh crore as of May 2026. Overall passive funds now account for 18 per cent of total mutual funds AUM. In comparison, in the US passive funds account for 50 per cent of the industry AUM, with active accounting for the other 50 per cent. 

 Unlike the US, the Indian capital market is still at a nascent stage, and there is a long way to go, so investment should still be a mix of active and passive, Agrawal said.

He points that in the US, promoter holding in companies is very low, perhaps in single digits. But, promoter holdings in Indian companies is very large. So, fund managers can still track companies actively and beat the index. 

According to him, over the last 10 year period, over a third of the mutual funds managed to beat the index while, two thirds underperformed. In comparison, in the US, only 10-15 per cent of funds consistently managed to beat the index, which is why the share of passive investments there increased. 

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 But he, believes that as institutional investing continues to scale up and individual funds become very large, it will increasingly become difficult to beat the index and that will build the case further in favour of passives. 

"As you go forward, as the institutional money becomes bigger, and each fund will become Rs 2-3 lakh crore, it will become very tough to beat the index on a consistent basis. So, why do I pay 1.5 per cent management fee?  I will take for 20-30 paisa index and be done with," stated Agrawal. 

He believes the pace of institutionalisation of the Indian capital will happen very rapidly and should be over 30-35 per cent by 2035.

Just as the US S&P 500 has become among the most popular indices in the world, in India too, as we go forward, broader indices will attract lot more funds. 

"There are a lot of customers suited only for passive. There are lot of institutions like trust funds, societies, where there is active management capability or it is advised that they shouldn't manage equity. They should come to passive funds," Agrawal pointed. 

An important point he makes is that passive funds' expense ratio is much lower than active funds, say around 75-100 basis points, and over long period of time, this cost differential will add up significantly, compounding each year. 

A key thing to watch, he says, is the tracking error of the fund, lower the better. 

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