India’s financial landscape is undergoing a significant transformation, fuelled by digital innovations, policy reforms, and growing investor participation. Amid these changes, passive investing has gained traction as a reliable and straightforward investment approach. While active investing often captures more attention, passive strategies offer a consistent and long-term option for investors who prefer a more hands-off approach to the market.
To replicate the performance of a market index, such as the Sensex or Nifty 50, a portfolio is built for passive investing. Rather than trying to beat the market by selecting individual stocks, passive investors aim to mimic the overall returns of the market. This approach typically makes use of low-cost index funds or exchange-traded funds (ETFs) that track specific indices in order to offer broad market exposure with minimal effort.
Why India Is Seeing a Rise in Passive Investing?
Cost Efficiency: A key benefit of passive investing is its low cost. Index funds and ETFs have significantly lower management fees as compared to actively managed funds. This cost-saving appeals to investors, as high fees can erode returns over time.
Simplicity and Accessibility: With the rise of fintech platforms and mobile apps, passive investing has become easily accessible to retail investors. The simplicity of investing in an index fund or ETF resonates with beginners and seasoned investors alike, offering a “set-it-and-forget-it” strategy.
Mitigating Unsystematic Risk: By tracking an entire index, investors gain exposure to the overall market, which smooths out the risk associated with individual stock picking. Over time, broad indices tend to recover from short-term market dips, providing steady growth for long-term investors.
Data-Driven Confidence: With more access to historical performance data, Indian investors have gained confidence in passive strategies. Historical data reveals that passive funds, particularly index-based investments, have delivered steady returns over the years, especially when compared to the unpredictable nature of actively managed funds.
The Current Relevance of Passive Investing in India
India’s financial market is at a critical stage, characterised by increased retail investor participation, greater awareness of personal finance, and the expansion of retirement planning services. Passive investing is gaining relevance for several reasons:
Performance of Passive Funds
Recent data highlights a compelling shift in the performance landscape between active and passive funds. According to the 2023 SPIVA report , 52% of active large-cap funds underperformed their benchmark over a one-year period, a marked improvement from the 87.5% that lagged in 2022. However, over a longer horizon, passive funds continue to show dominance. The report also reveals that 75% of mid-cap and small-cap funds have failed to outperform their benchmarks over the past decade. This trend reinforces the reliability of passive strategies, which consistently offer broader market returns with lower costs, making them an increasingly attractive option for investors seeking stable, long-term growth.
Diversification in a Growing Economy: As India’s economy expands across sectors such as technology, infrastructure, and consumer goods, passive funds offer investors a way to diversify their portfolios without needing to pick individual stocks. This diversification reduces risk while allowing investors to benefit from overall market growth.
Conclusion: The Future of Passive Investing in India
As India’s financial market continues to grow, passive investing is likely to play an increasingly vital role in shaping investment strategies. Its combination of cost-efficiency, simplicity, and market-wide exposure makes it an attractive option for a wide range of investors. In a market often driven by short-term speculation, passive investing offers a disciplined and long-term approach that aligns with India’s economic growth story.
Although active management will always have a role in investing, especially for those trying to beat the market, passive investing is a good substitute for those hoping to accumulate wealth gradually. In India’s dynamic financial landscape, passive strategies are poised to become an essential tool for navigating market complexities.
