India's mutual fund industry has witnessed a sharp rise in passive investing over the past few years, with investors increasingly choosing index funds for their relatively lower costs, transparency and ability to mirror the performance of a benchmark index instead of relying on active stock selection. According to reports from Dalal Street Investment Journal, index funds aim to replicate the returns of an underlying index by investing in the same securities in similar proportions, making them a popular choice for long-term investors. The passive investing ecosystem has now reached such scale that index inclusion materially moves stock prices, as S&P Dow Jones Indices estimated that approximately $20 trillion of investment assets were benchmarked to the S&P 500 as of December 2024, with roughly $13 trillion in passively managed assets. The S&P 500 index has delivered an average annual return of 10.5% since it was established in 1957, making it a low-cost, passive, and ideal approach for long-term wealth building.
Healthcare and capital market-focused index funds emerged as the top performers over the past year, with specialized thematic and sector-specific funds gaining significant traction. As reported by Dalal Street Investment Journal, unlike broad market index funds that track indices such as the Nifty 50 or Sensex, these specialized schemes follow specialised indices focused on sectors or investment themes such as healthcare, capital markets and financial services. Their performance largely depends on the underlying sector rather than the broader market. The mechanics of this forced buying have become a distinct market phenomenon, with Facebook's inclusion in the S&P 500 in December 2013 showing how long index providers are willing to wait for proper market conditions.
According to the latest data from Dalal Street Investment Journal, the top 5 equity index funds based on one-year returns as of July 8, 2026 are: Edelweiss MSCI India D&W Healthcare at 18.77%, Motilal Oswal Nifty Capital Market Index Fund at 17.08%, Tata Nifty Capital Markets Index Fund at 16.76%, Motilal Oswal Nifty Mid Small Financial Services Index Fund at 16.09%, and ICICI Prudential Nifty Pharma Index Fund at 14.18%. These funds demonstrate the strong performance of thematic and sector-specific index funds in the current market environment.
PSU stocks have made a remarkable comeback, with PSU indices delivering annualised returns of 20-26.5% on a trailing five-year basis as of July 8, 2026, significantly outperforming the Nifty 500's 11.2% annualised return over the same period. However, analysis shows that PSU stocks struggled before 2021 but emerged as clear outperformers from January 2021 onwards, driven by government capex push, balance-sheet repair, and renewed optimism around disinvestment. The four PSU index options - Nifty CPSE (11 stocks, 0.07% expense ratio), BSE Bharat 22 (22 stocks, 0.10% expense ratio), BSE PSU (60 stocks, 0.48% expense ratio), and Nifty PSE (20 stocks, 0.38% expense ratio) - show substantial overlap with portfolio overlap ranging from 34.8% to 59.4%. While these indices have delivered impressive recent returns, their long-term five-year rolling returns show PSU indices lagging the broader market with negative returns occurring more frequently.
