India's investment landscape is experiencing a dramatic transformation as passive funds have grown from 6% to 25% of the mutual fund industry in just a decade. According to Sid Swaminathan, MD and CEO of JioBlackRock Asset Management, this rapid shift is occurring at a pace unlike anything seen elsewhere globally. Speaking at the ET Alpha Wealth Summit, Swaminathan highlighted that the country has reached a genuine inflection point where first-time investors, seasoned equity holders, and a booming digital ecosystem are all transforming simultaneously. "The pace with which investor behaviour is changing feels a lot faster than it has happened elsewhere in the world," Swaminathan noted, citing the rapid progression from basic saving to active investing, followed quickly by conversations about asset allocation, global exposure, and alternatives.
Three key factors are fueling this passive investment boom, as reported by Swaminathan. Markets are maturing and becoming more efficient, making it harder for active managers to consistently beat benchmarks. Additionally, after approximately 18 months of flat equity returns, investors are beginning to question what they are paying active management fees for. Most significantly, more than 70% of large-cap funds are currently failing to deliver alpha over their benchmarks, creating a damning situation for the active fund industry. "Even that took 15 to 20 years elsewhere. It is moving pretty quickly," Swaminathan emphasized, noting that this pace of change is unprecedented globally.
The smallcap investment landscape has significantly expanded with the launch of the ICICI Prudential Nifty Smallcap 250 Exchange-Traded Fund (ETF), bringing passive smallcap funds back into focus. Investors now have 27 passive smallcap funds to choose from: 17 index funds and 10 ETFs. According to Jiral Mehta, senior manager, research at FundsIndia, "Active largecap funds have seen declining outperformance in recent years, so index funds or passive funds tracking largecap-oriented indices with a proven long-term record are preferred." However, the smallcap segment remains different, with Harsh Vira, chief financial planner and founder of FinPro Wealth, noting that "smallcap stocks are less researched and more volatile, giving skilled fund managers a better chance of spotting winners early."
Experts recommend different approaches based on investor preferences and risk tolerance. Active smallcap funds offer potential for alpha through stock selection, better risk management, and the ability to invest beyond the Nifty Smallcap 250 universe. However, these funds carry higher fees and no guarantee of outperformance. Passive funds provide diversified, transparent, and cost-efficient exposure but may include weaker companies by default and lack flexibility to respond to changing market conditions. Smart-beta options apply rules-based factor filters such as momentum, quality, or value to reduce exposure to weaker companies, though these strategies remain relatively new with limited track records across market cycles.
Swaminathan emphasized India's rapidly expanding digital ecosystem as a uniquely Indian accelerant that is enabling financial access and investor education at a scale and speed that has no real parallel globally. According to the panel discussion at the ET Alpha Wealth Summit, this digital infrastructure is creating unprecedented opportunities for financial inclusion and investment education across the country. "Together, these forces make India, in his view, one of the most exciting asset management markets in the world right now, not despite its complexity, but because of it," Swaminathan concluded, highlighting how India's unique combination of factors is driving unprecedented change in the investment landscape.
