Passive investing mirrors benchmark indices (e.g., Nifty 50, Sensex) without active stock selection, delivering market returns minus low costs. Passive funds (index funds + ETFs) reached approximately ₹15 lakh crore by June 2026, according to AMFI data, showing strong growth driven by rising investor interest in index funds and ETFs. Unlike active funds where managers attempt to outperform through stock selection, passive strategies replicate benchmark indices such as the Nifty 50 or the Sensex. The fund manager's role is limited to operational rebalancing to match index changes, with no discretionary stock picking occurring.
Both index funds and ETFs aim for low tracking error while differing in operational aspects. Index funds operate on end-of-day NAV basis with no demat requirements, making them simpler for retail investors. ETFs offer real-time trading with demat requirements, providing better liquidity and trading flexibility. Long-term returns are similar when tracking the same index effectively, with investors choosing based on preference: simplicity (index funds) or liquidity/trading (ETFs). Evaluate total costs, including transaction fees, when making your selection.
Smart beta (or factor) funds bridge traditional passive and active investing by using rules-based indices weighted by factors like value, momentum, quality, low volatility, or multi-factor combinations, rather than pure market-cap weighting. They remain fully passive with no discretionary stock picking, adding a 'smart' layer to core passive allocation. Popular in India via ETFs and index funds tracking factor-based indices on NSE/BSE, these strategies potentially outperform cap-weighted benchmarks over full market cycles, though with varying tracking error and costs. Data-heavy selection prioritises low total drag (expense + tracking error).
Equity-oriented passive funds (≥65% equity) follow standard taxation rules: Holding ≤12 months: STCG at 20%, Holding >12 months: LTCG at 12.5% on gains exceeding ₹1.25 lakh per year (no indexation). Tax efficiency favours long-term holding, with passive strategies delivering benchmark returns efficiently, suiting most investors' core portfolios. The most efficient approach involves direct plans through AMC websites or platforms like MF Central to maintain minimum expense ratios. Investors should review funds annually or when major changes occur, with SIP best for salaried earners to average costs over time.
