Why Index Funds Are Not Popular in India: A Comprehensive Analysis
Index funds are celebrated globally for their simplicity, cost-efficiency, and steady returns. In markets like the US, they are among the most popular investment options, with passive funds capturing more than half of mutual fund industry inflows. Yet, in India, their adoption remains relatively modest—even in 2025, despite rapid financial digitalization and awareness campaigns. Why haven’t Indian investors embraced index funds in the same way? This blog explores the reasons behind their limited popularity, contrasts global and Indian trends, and discusses the future outlook.
CA Bhaskar Abhishek
9/30/20253 min read
What Are Index Funds?
Index funds are a type of mutual fund that aim to replicate the performance of a particular market index—such as the Nifty 50, Sensex, or Nifty Next 50—by holding its constituent stocks in equal proportion. Unlike actively managed funds, where managers choose stocks and attempt to outperform the market, index funds rely on a passive “buy-and-hold” strategy. This approach delivers returns nearly identical to their benchmark index and is appreciated for being cost-effective, predictable, and convenient to manage.
The Promise of Passive Investing
Globally, passive investing has transformed wealth management. Index funds and ETFs offer broad diversification, lower expense ratios, tax efficiency, and transparency. Investors don’t need to track markets actively or rely on fund manager skill. In developed markets, such as the US, passive funds regularly beat expensive active funds over long periods due to market efficiency—making them hugely popular for retirement planning and long-term goals.
Low Popularity in India: Key Reasons
1. Belief in Active Management
The Indian stock market is perceived as less “efficient”; active managers are thought to uncover opportunities that broad indices miss. Historical data suggests many active funds outperform their benchmarks, fueling the belief that skilled managers can deliver alpha (excess returns) and higher gains than simply copying the index. As a result, investors and advisors favor active funds.
2. Index Structure and Concentration Risk
Indian indices are less diversified than US indices. For example, the Nifty 50 and Sensex are heavily concentrated in a few sectors—mainly banking, IT, and energy. This creates sectoral risk, as poor performance in these areas can drag down the whole index, making index funds vulnerable to cyclical downturns.
Furthermore, emerging sectors or new-age companies are often underrepresented due to index composition rules.
3. Fewer Product Options
Until recently, only a handful of index funds were available to Indian investors, with limited sectoral or thematic choices. Active funds offer a much wider selection, covering value, growth, small cap, mid cap, sectoral, and thematic strategies. The lack of variety has made index funds less appealing to investors who want tailored portfolios.
4. Retail Investor Preferences and Low Awareness
Many retail investors lack exposure to passive investing principles and financial literacy regarding market efficiency. There’s a strong preference for immediate or “high” returns, especially in bullish markets, leading people to seek actively managed funds. Additionally, passive funds are often perceived as “boring” or “average” compared to high-performing active funds.
5. Advisor and Distributor Influence
Financial advisors and distributors in India commonly recommend active funds, partly because these offer higher commission structures. Index funds have small expense ratios and generate lower fees, reducing the incentive for intermediaries to push them.
6. Tracking Error and Liquidity
Indian index funds and ETFs sometimes face tracking errors—meaning their actual returns deviate slightly from the benchmark index due to delayed portfolio updates or costs. Additionally, ETF liquidity is still growing, making buying or selling units harder in smaller funds or market downturns.
The Changing Landscape
Despite these challenges, index funds are gradually gaining ground in India. The Securities and Exchange Board of India (SEBI) is pushing for more transparency and lower costs in the mutual fund industry. Over 100 new passive funds launched in 2025 alone, offering investors more options and bringing fresh competition to the market. Digital platforms, direct plans, and robo-advisors are making index funds more accessible and affordable, especially to tech-savvy millennials and first-time investors.
For Whom Are Index Funds Ideal?
Long-term investors seeking consistent growth with minimal fees and effort.
Beginners wanting broad market exposure without asset picking.
Passive investors who prefer systematic investment plans (SIPs).
Retirement and goal-based planners aiming for compounding market returns.
Prospects and Future Outlook
The appeal of index funds—low cost, diversification, and simplicity—is slowly being recognized by the new generation of Indian savers. Markets are also becoming more efficient as company disclosures and regulations improve. As financial literacy spreads, passive investing could become a significant part of the retail investor’s portfolio in the coming decade, especially as global investors increase their presence in India.
Conclusion
Index funds are rising, but not yet mainstream in India. Cultural and market factors still favor active management, but transparency, awareness, and low fees may gradually shift investor behavior. For those embarking on wealth-building journeys, considering a mix of active and passive strategies is prudent—watch the trend, understand the risks, and don’t underestimate the power of the humble index fund.
Article by CA Bhaskar Abhishek
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