The Passive Investing Bubble: Know All About Index Funds — Benefits, Risks, and Market Realities

 

If there’s one trend that’s quietly reshaping both Indian and global markets today, it’s passive investing. From new-age investors just starting their SIPs to global institutions parking billions, index funds and ETFs have become the default choice. But as with any investing strategy, there’s more to the story than just low fees and market-matching returns.

 

As Vice Chairman of Berkshire Hathaway & also a successful investor, Charlie Munger once said: “The rise of index investing creates a huge paradox: It works best when relatively few people are doing it.” 

Let’s unpack why passive investing is so popular, what risks it carries, and how you can use it wisely as an Indian investor today.

What Is Passive Investing?

Passive investing means putting your money into funds that simply mirror a market index — like:

• Nifty 50
• Sensex
• S&P 500

These funds don’t pick stocks actively. They buy and hold all the stocks that make up the index, in the same proportion.

 

Why It Became Popular:

• Lower Costs: No expensive fund managers = lower fees.
• Market-Matching Returns: Historically, many active funds fail to beat the index consistently.
• Less Stress: You don’t need to study companies or time the market.

 

As Chairman & CEO of Berkshire Hathaway, Warren Buffett famously endorsed this approach:

“By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”
— Warren Buffett

 

How Big Is Passive Investing in India Today?

According to AMFI (2025), passive funds in India now manage over ₹5 lakh crore in assets — a number that has tripled in just the last three years.

This surge is driven by:

• Growing awareness among retail investors.
• Low-cost investing platforms and apps.
• Global market trends influencing Indian habits.

 

The Other Side: What Are the Hidden Risks?

While passive investing sounds safe, here are key downsides novice investors often miss:

Concentration Risk:

• In Nifty 50, just 5–6 stocks control nearly 40% of the total weight.
• That means even if you’re buying “the whole market,” most of your money is tilted toward a few giants like Reliance, HDFC Bank, etc.

Liquidity Risk:

• During sharp market falls, if too many investors exit index funds simultaneously, it can trigger larger-than-expected sell-offs.

No Quality Check:

• Passive funds hold stocks purely because they’re part of the index—not because they’re fundamentally strong or undervalued.
• If a weak company stays in the index, passive funds keep buying it anyway.

 

When Did Passive Investing Take Over Globally?

• Globally: Passive investing really took off post-2008, especially in the U.S., with giants like Vanguard and BlackRock leading the way.
• In India: Growth accelerated post-2017, with massive retail participation after 2020, thanks to digital platforms and awareness campaigns.

 

Active vs. Passive: What’s the Balance?

Passive investing is powerful. But should it be your entire portfolio? Probably not. Here’s how to think about it:

Mix It Up: Combine index funds with mid-cap, small-cap, and actively managed funds.

Watch the Weightage: Be aware of how much of your index fund is concentrated in a few stocks.

Don’t Just Set and Forget: Review your portfolio at least once a year. Even passive needs maintenance.

 

Founder’s Perspective

“Balance simplicity with awareness. Passive investing isn’t wrong—it’s just incomplete if done blindly. Trends come and go, but thoughtful allocation always stays relevant.”
—  Founder, NAM Securities Ltd.

 

Closing Thought

Index funds can be an excellent core holding for any investor. But as markets evolve, so must your strategy.

Passive investing is not a replacement for smart investing. It’s a tool—and like any tool, how you use it matters.

Before your next SIP, ask yourself:

• Am I aware of where my money is really going?
• Is my portfolio balanced beyond just index funds?
• Am I blindly following the crowd or investing with clarity?

If you’d like help understanding how to balance passive and active investments in your portfolio, feel free to reach out to NAM’s Team.