Retail investors have played a crucial role in the explosive growth of index funds, with a study by Zerodha Fund House revealing a 12-fold increase in the number of retail folios in these funds over the past three years. As per the study, retail folios in index funds surged from 4.95 lakh in March 2020 to a staggering 59.37 lakh by December 2023. This growth underscores a rising interest among individual investors in passive investing, which offers a diversified portfolio with relatively lower management costs.
In tandem with the increase in folios, the overall number of index mutual funds in the market has also seen remarkable growth. From just 44 in March 2020, the number of available index mutual funds ballooned to around 207 by March 2024. This translates to a significant growth of 370 percent, showcasing the expanding options for investors seeking a low-cost alternative to actively managed funds.
One of the key highlights of the study was the substantial increase in the assets under management (AUM) of index funds, both in equity and debt categories. The total AUM of index funds grew by approximately 25 times, reaching ₹2.13 lakh crore by March 2024, up from its March 2020 levels. Notably, debt index funds emerged as a dominant force within this space, contributing 51.5 percent of the total AUM. Until March 2021, debt index funds had negligible assets, but they have now crossed the ₹1.1 lakh crore mark as of March 2024, reflecting a growing preference among investors for fixed-income index funds.
The report further indicated that as of March 31, 2024, there were 120 equity index funds and 87 debt index funds available to investors. The dominance of the Nifty 50 index is particularly significant, with 70.7 percent of the total AUM of index funds, or ₹52,000 crore, allocated to Nifty 50 funds. This reflects a clear preference for large-cap stocks among investors seeking stability and lower volatility. The Nifty Next 50 index, which holds 14.6 percent of total AUM at ₹10,000 crore, also attracted investors, offering exposure to mid-cap and small-cap stocks for those with a more balanced risk appetite.
The Zerodha report also pointed out that the total assets in the index fund category reached a record high of ₹2.43 lakh crore by June 2024. Over the past three years, index funds have experienced the highest AUM growth across all mutual fund categories, recording a phenomenal 900 percent increase. This surge in assets reflects the growing popularity of index funds among both retail and institutional investors, driven by factors such as transparency, lower costs, and the potential for consistent returns.
With retail investors continuing to embrace index funds, the category is poised for further growth. As the study concludes, the shift towards passive investing is gaining traction, offering a promising avenue for investors looking to capitalize on broad market performance without the higher fees associated with active management.
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