From Financialexpress · Saumitra Bhaduri · · 1m 30s
India’s passive turn
India balances passive investing growth with market resilience.
In brief
India balances passive investing growth with market resilience. India must balance passive investing growth with market resilience to avoid inefficiency while maintaining price discovery. Originally reported by Financialexpress.
Passive investing origins
Passive investing began with Harry Markowitz's 1952 portfolio theory showing diversification improves risk-return trade-offs.
First passive fund launched
John C Bogle launched the world's first index mutual fund in 1976, the Vanguard 500 Index Fund.
US passive dominance
By 2025, passive funds held over half of the US fund market with 63% of equity assets at $22 trillion.
Market inelasticity concern
Passive investors show inelastic demand, meaning price changes affect market value more than quantity adjustments.
Inelastic markets hypothesis
Xavier Gabaix and Ralph Koijen's 2021 research shows $1 inflow can raise market value by $5, challenging efficient markets theory.
India's passive growth
India's passive mutual funds grew from 3% of AUM in FY17 to 18% by end of FY26, reaching `14.63 lakh crore.
India's market position
India sits between Japan's passive expansion and China's active strategy dominance in regional markets.
Market concentration risk
Indian equity indices are already concentrated, with passive inflows potentially reinforcing dominant firms' market share.
Price discovery risk
As passive investors grow, markets may become less responsive to new information and more influenced by flows.
Flow-driven volatility
Large passive inflows can inflate prices while outflows amplify declines, creating episodic market volatility.
At a glance
India must balance passive investing growth with market resilience to avoid inefficiency while maintaining price discovery.
