Jain attributed this retail surge to the simplicity and transparency of passive products, noting that the mutual fund penetration in India remains low, with only about 5.4–5.5 crore unique PAN folios. “If we want 15–20 crore investors to enter, we need to give them simple products—and nothing is simpler than passive,” he said.
Anand Vardarajan, Chief Business Officer at Tata Asset Management, agreed that investors are now being offered a full suite of passive options, from basic Nifty 50 trackers to thematic and smart beta products. “It’s really up to them to choose based on their sophistication,” he said, adding that even mid- and small-cap indices can work well for those seeking broad exposure without stock-specific risk.
Both experts underscored the benefits of using passive strategies to build a well-diversified core portfolio, complemented by active or thematic ideas for those with higher risk appetite. The active versus passive debate continues, but as Jain pointed out, “Even if five active funds outperform today, how do I consistently pick the right one tomorrow? That’s the real challenge.”
Below is the excerpt of the discussion.
Q: So, let’s start by getting your bird’s-eye view on where we are. That number I just spoke of—almost ₹12 lakh crore of AUM. And why has Zerodha chosen to go all-passive?
Jain: You said the numbers—12 lakh crore—approximately about 75% of that is in ETFs, and about 25% of that is in index funds. We’ve seen huge growth, especially in the last couple of years, in terms of traction from retail investors. If you look at the history of passive investing, we started off in the early 2000s in India. I would say the first 15 years saw traction coming more from institutions. From 2015 to 2020, it came from the HNI side. Over the last five to six years, we are seeing traction coming from the retail segment as well.
If you look at the number of investors using ETFs currently, there are approximately 1.8 crore investors. In the last nine months—from April 2024 to December 2024—about 45 lakh new ETF users have been added. To put that in context, 45 lakh investors were what we had accumulated in the first 20 years of ETFs. So that is what has been added in just nine months. And approximately the same number of investors—about 45 to 50 lakh folios—have been added in index funds as well. These numbers speak for themselves—traction is clearly coming from retail investors.
As for Zerodha Fund House, the main reason we exist is because, at this point in time, if you look at the penetration of mutual funds, there are about 5.4 or 5.5 crore unique PAN folios in India. That’s approximately just about 3% of the Indian population. We feel this number needs to go up much higher. We believe that if you want the next 15–20 crore investors to come into mutual funds, you need to offer them simple products. And what could be simpler than introducing passive products?
Q: Anand, when you talk about a passive fund that simply replicates the Nifty 50, instead of making complex stock selections, it sounds easy. But now you have new indices coming up every day. The exchanges—BSE and NSE—are creating newer and newer indices, and there are more and more products coming out based on these indices. So where are we headed?
Vardarajan: I think we’ll have to offer the entire plethora of options to investors, and it’s really up to them to choose. Whether you’re a sophisticated client or a beginner, investors are at different stages of understanding. A simple Nifty 50 index could be a starting point. As investors get more sophisticated, they may say, “Okay, can I get something broader than that—a broad market index? Can I look at a midcap or a smallcap index? Can you give me a smart beta passive product?”
So, some investors may want to invest in themes or sectors that could provide additional alpha. These are the kinds of options we should offer—essentially a full suite of passive products.
Q: In FY25, which just concluded, AMFI data shows that 150 passive mutual fund schemes were launched. Of these, 102 were index funds. There were three new gold ETFs launched, thanks in part to the rising gold prices, and 45 other ETFs were launched. So, clearly, the industry is evolving rapidly. For a lay investor, it’s easy to understand a simple Nifty 50 tracker fund—it just mirrors the index. But what should be the next few steps for someone who wants to use passives in a more evolved way to complement an existing portfolio?
Jain: The beauty of passive products is that you can create many different cuts and themes, sector, or segments. But what investors should always be mindful of is while building a good asset allocation mix, you shouldn’t be loaded only towards equity or one particular segment or sector. It’s good to diversify across equity, debt, and commodities—and you can do all this through passive products.
Within equity, you can take exposure to large-cap, mid-cap, and small-cap. You can mix these depending on your risk appetite. If you’re someone who wants to take more risk, you can tilt your portfolio toward mid-caps and small-caps. If you’re more conservative, allocate more to large-caps.
Also, include gold and debt. Gold has a very low correlation with equity, so adding it reduces your portfolio risk. One approach is to view your portfolio as core and satellite: the core is passive, the satellite is where you can take additional risk, maybe through an active fund or a sectoral/thematic idea. You can decide the split—75:25, 60:40—based on your risk appetite.
Q: And you have products on both sides. You can build this core and satellite portfolio through active funds, passive funds, or a mix. The question is—what’s the right balance? Let’s start with large-cap. Conventional wisdom says large-cap exposure should increasingly be through passives. Passive funds are obviously cheaper—expense ratios are much lower. Anand, would you say it’s time to meet 50–60% of a large-cap requirement through passives? Or is there still a case for active management?
Vardarajan: There are nuances to consider. First, which market phase are we in? Think of it like the monsoon in Mumbai—it rains heavily, but you never know which day. Same with active versus passive.
For example, between 2016 and 2018, passives did extremely well. A few heavyweight stocks drove the index higher, and active funds couldn’t match that due to stock-level limits. Conversely, in a broad-based rally like we see now, alpha comes from stock picking, not just index movement.
Also consider the investor’s skill. Can you pick the right stocks? If yes, go narrow and deep. If not, go shallow and wide—buy the index.
And remember, the index itself isn’t static. It’s a dynamic filter. It weeds out underperformers and brings in better stocks. Forty years ago, Sensex had many textile companies. Today, none remain. The sectors and companies evolve. So, the index adjusts over time, which is powerful.
Q: Vishal, weigh in on this active versus passive debate. I remember the SPIVA report—S&P Indices Versus Active—which often said most funds underperform the benchmark. That led to the argument: why pay 2–2.5% expense ratios for active management if they underperform?
Jain: That debate is still ongoing. In large-caps, about 80–85% of funds still underperform the index. In mid-caps, I don’t have exact numbers, but it’s around 70–75% if I recall correctly.
But the bigger issue is not just beating the index. It’s whether you can pick the right stock, the right sector, the right fund manager. Even if someone shows you five funds outperforming the benchmark, those five keep changing. So how do I consistently pick the right one? That’s the challenge, regardless of category.
Q: So, just to round off the large-cap versus mid-cap debate—why do we say large-cap exposure should be via passives? It’s because large-cap companies are well-covered, there’s little information arbitrage. Everyone knows the same data. But in mid- and small-caps, where there’s a much wider stock universe, maybe human intelligence can beat the index?
Vardarajan: You’re right. I can argue both sides. If you know what you’re doing—hedge it. If you don’t—diversify. Small and mid-cap spaces are tricky. Get one wrong stock, and you’re stuck. So, the second-best option is to buy the entire index. That diversifies away individual risk.
Think about it—there’s less information, less access to management, disclosure issues, governance concerns. Do you have the time and skill? Probably not. So, buy the entire index. At least you’ll mirror it over time.
It’s like boarding a Mumbai local train. The best seat is the window seat. Second best is just getting into the train. Both reach the next station at the same time. One has a rough ride, one has a smoother ride—but both arrive. The question is—how sure are you of getting the window seat?
Watch accompanying video for entire conversation.
