Mutual fund houses launch over 100 passive funds in 2025. Will Sebi's new rules shift the trend?
With mutual fund houses launching over 100 passive funds compared to fewer active ones, experts say fund houses see greater growth potential in passive offerings because under current guidelines, only one active fund per category is allowed, while multiple passive funds can be launched — a rule that may change going forward'While passive investment is getting popular, the surge in launches is more AMC-driven rather than from a pure investor preference change. Many times passive funds are advertised as cheaper than active funds, but if active funds are providing higher returns than passive funds, then the difference is still justified as long as the alpha is higher than the savings in expenses,' Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance shared with ETMutualFunds.As on July 22, 2025, mutual funds have launched 162 mutual funds of which around 106 were passive funds whereas 56 were active funds. Out of 106 passive funds, there were 53 index funds , 30 ETFs , 21 fund of funds investing domestically, and two debt oriented passive funds.A further deep dive in the data should, Groww Mutual Fund has launched 15 passive funds followed by Kotak Mutual Fund which has launched 13 passive funds.According to a report by ETBureau, passive funds tend to shine when markets are efficient and opportunities for stock-picking are scarce. Their low costs give them an edge, but the real kicker comes when market rallies are driven by a handful of heavyweight stocks—think narrow leadership—leaving active fund managers struggling to keep pace, especially when stretched valuations make selective bets tricky.The goal of an active fund is to outperform a specific benchmark index through strategic investments and market timing. On the other hand, passive funds, also known as index funds, aim to replicate the performance of a specific market index. Instead of trying to outperform the market, passive funds seek to match the returns of the benchmark index.So with fund houses focusing more on passive funds, is this rise a signal that market valuations are making active outperformance more difficult? To this Minocha answers that things are moving towards passive investing in the large cap space mainly because active managers find it very difficult to constantly outperform the index and tend to mirror the index when adjusted for higher TERs.'In mid-and small-cap areas, however, a good fund manager would be able to add alpha because of low market efficiency. A mix of these two strategies works well depending on one's asset allocation and risk appetite,' he added.The market regulator, Sebi , recently proposed to review the categorisation of mutual fund schemes to improve clarity, introduce new schemes and to address the issue of overlap in portfolios of schemes.For the active funds, there were different proposals based on categories, however for passive funds, the key three proposals were - should MFs be allowed to offer solutions oriented life cycle fund of funds with a target date in the structure?. Secondly, should mutual funds be allowed to offer solution oriented life cycle fund of funds, with a lock in, for other specific goals such as housing, marriage etc?. And lastly, should mutual funds be allowed to offer solutions oriented life cycle fund of funds with different lock-in period such as 3 years, 5 years or 10 years?Sebi has asked for comments/ suggestions to be submitted latest by August 8. If these proposals are accepted, what benefit will active and passive funds have post this?The expert commented that the intent of SEBI is good in rationalising fund offerings, but careful implementation is required.For active funds, Minocha said that the AMCs which have extremely high AUM are able to manage very well without needing a second scheme and an additional launch of funds in the same category could confuse or hurt the morale of existing investors.'The Target Maturity FoF whereby shifting from equity to debt over time may look attractive, but the taxation-as-per-slab-on-maturity perspective may really hurt the long-term investor in the higher tax brackets,' Minocha said.The decision between active and passive funds depends on your investment goals, risk tolerance, and preference for management style. Therefore, one should always consider risk appetite, investment horizon, and goal before making an investment decision.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and Twitter handle.
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