Index funds have experienced a dramatic transformation in retail investor preference over the past five years. According to the AMFI-Crisil Factbook 2026, the share of index funds in retail passive assets under management jumped from 11.5% in March 2021 to 55% in March 2026. Meanwhile, the share of other Exchange-Traded Funds (ETFs) fell sharply from 83.8% to 30.1% over the same period, as reported by Mint. This shift occurs despite ETFs being considered the cheaper option due to their lower expense ratios. The popularity of passive investing has expanded beyond traditional indices like Sensex and Nifty, with both ETFs and index funds now available across a much wider spectrum including broader indices, sectors, themes, and fixed income products.
While ETFs typically have expense ratios ranging from 0.04–0.10% compared to 0.10–0.40% for equivalent index funds, experts warn against treating cost as the sole factor. According to economist Sharad Kohli, investors may incur additional costs including brokerage charges, bid-ask spread, STT and other transaction costs. The liquidity issue is particularly significant, with Value Research reporting that even within large-cap ETF categories, a small number of funds account for overwhelming majority of daily trading, leaving dozens of alternatives with thin liquidity. As noted by Harendra Zatakia, investors should consider tracking difference and actual return delivery relative to the index rather than simply choosing the fund with the lowest expense ratio.
The mutual fund industry's familiarity-building efforts, including the 'Mutual Funds Sahi Hai' campaign and growth of SIPs, AMCs, distributors and digital platforms, have made mutual funds a familiar investment vehicle for millions of investors. According to Zatakia, many new investors entering the market are first-time equity investors who find index funds a relatively simple way to get diversified equity exposure. The convenience of mutual funds offering SIPs with exact rupee deployment, rather than requiring whole ETF units, has also contributed to their appeal. As reported by Mint, index funds can form the core of a portfolio for long-term investors with monthly surplus, starting at ₹500 with no demat account and no brokerage.
According to Prithvi Potta from Wert Finserve, index funds suit investors seeking steady, low-cost market tracking without regular monitoring, including first-time investors, salaried people building goal-linked SIPs, or seasoned investors who no longer want to bet on fund manager selection. Wealth Café Investment Advisors' Harsh Vardhan Dawar notes that each investor must have proper asset allocation towards debt, equity and gold, with index funds being suitable for non-active investors while ETFs work better for frequent or active investors. The expert emphasizes that ETFs can be useful for lump-sum deployment or international exposure, where the structure typically works better than index funds. Within equities, investors can choose products tracking broader indices as well as sectors and themes such as banking, manufacturing, metals, PSU banks, chemicals and energy, while passive options are also available in fixed income and commodities through gilt ETFs, target maturity funds, and gold and silver funds.
