India's investment ecosystem is undergoing a seismic shift, with index investing gaining unprecedented traction among investors, says a report by Motilal Oswal.
The Generational Shift
The younger generation, including Gen Z and Millennials, shows a stronger inclination towards index funds as compared to older investors. They also prefer Index funds over ETFs for better returns and easy liquidity.
While 46 per cent of younger investors favour index funds, only 35 per cent of Gen X and Boomers do so. Millennials and Gen X investors also exhibit a notable interest in Factor or Smart Beta Funds, reflecting their appetite for innovative investment strategies.
Passive funds have become a core component of investor portfolios, with 80 per cent of investors increasing their allocation to these funds in 2024, compared to 53 per cent last year.
Sectoral indices like Nifty IT and Nifty Bank dominate as the top choice for passive fund investors, selected by 67 per cent of respondents. | Image: Wikipedia (Representative)
The survey also noted a growing popularity of ETFs, with 57 per cent of respondents investing in them, up from 41 per cent in 2023. Of these, 26 per cent invest solely in ETFs, while 31 per cent have diversified between ETFs and index funds.
This rising preference is matched by a commitment to long-term investment. A significant 81 per cent of investors plan to hold their passive investments for over three years, highlighting sustained confidence in the growth potential of these funds.
Sectoral indices like Nifty IT and Nifty Bank dominate as the top choice for passive fund investors, selected by 67 per cent of respondents. Benchmark indices such as the Nifty 50 and Nifty 500 follow closely, preferred by 61 per cent of investors.
Passive Funds In Focus
Meanwhile, commodities and Smart Beta Funds are gaining traction, particularly in financial hubs like Mumbai and Ahmedabad.Passive funds, including index funds and ETFs, offer significant advantages. By closely mirroring the composition and weightings of benchmarks, such as the Nifty 50, these funds deliver cost-effective, straightforward, and consistent returns.
Investors are increasingly drawn to these attributes, with 63 per cent citing better risk-adjusted returns as the primary reason for choosing passive funds.
The combined Assets Under Management (AUM) of passive funds have surged from Rs7 lakh crore in September 2023 to over Rs11 lakh crore by September 2024--a 1.5x growth in just one year.
This meteoric rise reflects the increasing confidence of investors in index funds and exchange-traded funds (ETFs), driven by technological advancements, regulatory support, and improved financial literacy.
