Equity and Passive Funds Gain Ground: How Investor Allocation Has Shifted Over 5 Years

India's overall mutual fund industry Assets Under Management (AUM) have grown roughly three-fold over five years. This growth isn't just about more money entering the system — it also reflects a change in where that money is going, with equity-orientated and passive strategies both capturing a larger share of investor attention than before.

•     Rising participation from Gen Z investors, women, and first-time investors from smaller cities is cited as a structural driver of this expansion.

•     Deeper penetration beyond India's top 30 cities is broadening the retail investor base geographically.

•     A broader shift of household savings toward financial assets (versus physical assets like gold or real estate) continues to support inflows.

Equity Funds: The Primary Growth Engine

Open-ended equity mutual funds have been the single largest contributor to industry AUM growth. According to ICRA Analytics data, equity fund net AUM surged 335.31% over five years, rising from ₹7.65 lakh crore in July 2020 to ₹33.32 lakh crore in July 2025 — and has since climbed further, touching a record ₹38.36 lakh crore by July 2026.

Fig 1: Equity mutual fund net AUM trend over five years (illustrative path to reported figures). Source: ICRA Analytics analysis of AMFI data.

Quick View: Why Equity Funds Keep Attracting Money

•     Sustained SIP participation: Regular, fixed monthly investing lets investors benefit from rupee-cost averaging — buying more units when prices fall and fewer when prices rise.

•     Long-term mindset: More investors are treating short-term market dips as part of the journey rather than a reason to exit.

•     Consistent net inflows: Equity-orientated schemes have recorded a continuous streak of monthly net inflows extending back to March 2021.

•     Category diversification: Flexi-cap, sectoral/thematic, and mid-cap funds are now among the largest individual equity categories by AUM.

Passive Funds: A Structural Rise, With Some Recent Moderation

Passive funds — index funds and Exchange Traded Funds (ETFs) that track a market index rather than relying on active stock picking — have seen their share of total industry AUM roughly triple since 2019. This growth reflects both demand-side factors (investor preference for low-cost, transparent products) and supply-side factors (a wave of new passive scheme launches and regulatory changes).

Fig 2: Passive funds' share of total mutual fund industry AUM has risen sharply since 2019, though it has eased slightly from its 2023 peak.

Quick View: What's Driving Passive Fund Adoption

•     Lower costs: passive funds typically carry a lower expense ratio than actively managed funds, since there's no active stock-picking research built into the fee.

•     Simplicity and transparency: investors know exactly what a passive fund holds, since it mirrors a published index.

•     Benchmark-hugging regulatory shifts: SEBI's fund categorisation rules and the shift to Total Return Index (TRI) benchmarking have made it harder for many active funds to consistently beat their benchmark, a factor some industry commentary links to rising passive interest.

•     New entrants: an increasing number of fund houses have launched index fund and ETF products, widening investor choice within the passive category.

•     Gold and silver ETFs: in recent months, precious-metal ETFs have also driven a meaningful share of new passive fund accounts, alongside traditional equity index products.

It's worth noting the trend hasn't been in a single straight line: passive funds' AUM share dipped slightly from a peak of about 17.7% in March 2023 to around 16.6% more recently, as certain active fund categories — particularly mid-cap and small-cap schemes — outperformed broader indices during a strong phase for those market segments.

Fastest-Growing Segments: Mid-Cap and Small-Cap Funds

Within the active equity space, mid-cap and small-cap fund categories have expanded at a particularly rapid pace over five years, even as investors have grown more selective following recent bouts of market volatility.

Fig 3: Five-year AUM CAGR comparison across fast-growing mutual fund segments. Source: ICRA Analytics data for mid-cap/small-cap; illustrative figures for passive/overall equity based on published growth trends.

•     Mid-cap fund AUM grew from ₹1.13 lakh crore (Feb 2021) to ₹4.62 lakh crore (Feb 2026) — a 32.41% five-year CAGR.

•     Small-cap fund AUM grew even faster, from ₹67,764 crore to ₹3.64 lakh crore over the same period — a 39.93% CAGR.

•     Both categories, which had seen net outflows five years earlier, are now recording steady monthly net inflows.

Rather than framing this as an either/or choice, ICRA Analytics has pointed to a blended approach amid global market volatility driven by geopolitical tensions and currency swings. The firm notes that passive strategies tend to work well in stable, trending markets, while active fund managers can offer advantages during volatile periods — for instance, the ability to adjust sector allocations dynamically or avoid richly valued stocks.

Quick View: Active vs. Passive — General Characteristics

General characteristics only — actual costs, holdings, and suitability vary by specific scheme. Not a recommendation of either approach.

Frequently Asked Questions (FAQs)

Ques: What does the ICRA Analytics report on equity and passive fund allocation actually track?

It tracks how Indian mutual fund investor money has moved across broad fund categories over roughly five years, based on AMFI data, highlighting that equity-oriented and passive (index/ETF) schemes have captured a growing share of overall inflows and assets during this period.

Ques: What is the difference between an equity fund and a passive fund?

An equity fund invests predominantly in company shares and may be either actively managed (a fund manager selects stocks) or passively managed. A passive fund, specifically, simply replicates a market index like the Nifty 50 or Sensex, buying the same stocks in the same proportion, without a manager making individual stock calls.

Ques: Why has passive fund AUM grown so quickly in India?

Reported growth drivers include lower costs compared with active funds, rising investor awareness of index-tracking products, structural factors like SEBI's fund categorisation and Total Return Index (TRI) benchmarking norms, and periods where broad market indices delivered competitive returns relative to actively managed schemes.

Ques: Has passive investing overtaken active investing in India?

No. As of the more recent industry data, passive funds account for roughly 16-17% of total mutual fund industry AUM, meaning active funds still represent the large majority of assets; the trend shows a rising passive share over time, not a complete shift.

Ques: Why do equity mutual funds keep attracting inflows despite market volatility?

Reports point to inflows continuing for many consecutive months, aided by structural factors such as rising SIP participation, increasing financial literacy, digital investing platforms, and investors adopting longer time horizons that look past short-term market swings.

Ques: What is SIP AUM, and how big has it become?

SIP AUM refers to the cumulative value of investments made through systematic investment plans. It has grown to roughly a fifth of total industry AUM in recent data, reflecting a broad, sustained shift toward disciplined, regular investing rather than one-time lump-sum decisions.

Ques: Are mid-cap and small-cap funds part of this equity allocation shift?

Yes. Data analysed by ICRA Analytics shows mid-cap and small-cap fund categories have grown at a particularly fast pace in assets under management over the past five years, even as short-term returns have been more volatile in some periods, reflecting continued but selective investor interest in these categories.

Ques: Should I move all my money into passive funds based on this trend?

This is a general information article, not investment advice, and it does not recommend any specific allocation. Whether active, passive, or a mix suits you depends on your own goals, risk appetite, and time horizon — a SEBI-registered financial adviser can help evaluate that for your situation.

Ques: Does a rising passive fund share mean active funds are underperforming?

Not necessarily; performance varies by category, time period, and individual scheme. Some industry commentary attributes passive growth partly to the relative underperformance of certain active fund categories over specific stretches and partly to cost and simplicity preferences — both dynamics can coexist without one fully explaining the trend.

Ques: Where can I verify the latest official mutual fund AUM and inflow data?

The Association of Mutual Funds in India (AMFI) publishes monthly industry data at amfiindia.com, and SEBI-registered research firms such as ICRA Analytics periodically publish analysis based on this data – both are good starting points for verifying current figures before making any decisions.

Disclaimer:

This is written for educational and informational purposes only. Nothing here constitutes investment advice or a recommendation to buy or sell securities. All data is sourced from publicly available information. Investments in securities markets are subject to market risks — please read all offer documents carefully before investing.