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India's Passive Investing Era May Be Ending, Says Veteran Investor

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  Published in Stocks and Investing on Tuesday, January 6th 2026 at 5:55 GMT by moneycontrol.com

The End of Passive Investing in India? Veteran Investor Vikas Khemani Sounds an Alarm

For years, passive investing – primarily through index funds and ETFs – has been lauded as a simple, cost-effective way to participate in Indian market growth. However, veteran investor Vikas Khemani, Managing Director of Edelweiss Securities, is challenging that narrative with a bold prediction: the era of easy gains from passively tracking Indian indices might be coming to an end, and for at least the next decade, active management holds significantly more promise.

Khemani’s argument, articulated in a recent interview with Moneycontrol, isn't about dismissing passive investing entirely. Rather, it’s a nuanced critique of its current dominance and suitability within the Indian context, especially given evolving market dynamics. He believes that the significant “alpha” (outperformance relative to a benchmark) currently available lies outside the Nifty 50 and other major indices.

Why Passive Investing Became So Popular – And Why That Might Be Changing

To understand Khemani’s stance, it's important to recap why passive investing gained such traction in India. Historically, Indian markets were characterized by significant inefficiencies, allowing skilled active managers to consistently outperform benchmarks. However, the rise of institutional investors, increased market awareness among retail investors, and the proliferation of low-cost index funds dramatically shifted the landscape. The Nifty 50, representing the top 50 companies by market capitalization, became increasingly concentrated, with a relatively small number of large players driving most of the returns. This concentration made it easier for passive strategies to capture those gains at a lower cost than active management, which involves research, analysis, and higher expense ratios.

Furthermore, the post-2008 financial crisis environment fostered a general distrust of active managers who struggled to deliver consistent results. This contributed to the global “passive revolution,” with investors flocking to low-cost index funds as a seemingly foolproof way to participate in market growth. The Indian market followed suit, experiencing explosive growth in assets under management (AUM) for passive investment vehicles.

Khemani's Core Argument: Diminishing Alpha and Market Concentration

Khemani argues that the conditions which made passive investing so successful are now changing. He points to several key factors:

• Decreasing Alpha: The easy alpha generation seen in previous decades is evaporating. As more capital flows into index funds, it pushes up the prices of companies already within the indices, diminishing their potential for significant outperformance. He suggests that the “low-hanging fruit” has been picked.
• Market Concentration & Index Domination: The Nifty 50 and other major indices are becoming increasingly dominated by a handful of mega-caps (very large companies). This means a disproportionate amount of market returns is driven by these few giants, making it harder for smaller, potentially faster-growing companies to contribute significantly. Khemani believes that opportunities lie in identifying those overlooked or undervalued smaller and mid-sized companies outside the indices.
• Structural Changes & Emerging Themes: India's economic landscape is undergoing significant structural changes – digitization, manufacturing resurgence (under initiatives like "Make in India"), increasing rural consumption, and a growing middle class. Khemani believes that these trends are creating opportunities for companies operating outside of the traditional index constituents, but which haven’t yet been fully priced into the market. These thematic plays require active research and stock picking to identify winners.
• Active Management's Advantage in Volatility: Khemani highlights that periods of increased market volatility (like we've seen recently) favor skilled active managers who can adapt their portfolios, navigate uncertainty, and capitalize on opportunities arising from market dislocations. Passive strategies, by definition, remain tethered to the index, even when it’s underperforming or facing headwinds.

The Importance of "Alpha Seeking" & Identifying Hidden Gems

Khemani emphasizes the need for investors to shift their focus towards “alpha seeking” – actively searching for investments that can outperform benchmarks. This requires a deep understanding of individual companies, industries, and macroeconomic trends. He believes that identifying these hidden gems—smaller companies with strong growth potential or those benefiting from emerging themes—is crucial for generating superior returns in the future.

He stresses that this doesn’t mean abandoning passive investing altogether. A blended approach – utilizing both active and passive strategies – could be beneficial. However, he strongly advises against relying solely on passive investments to achieve long-term financial goals in India's evolving market environment.

Implications for Retail Investors & Fund Managers

Khemani’s commentary has significant implications for Indian retail investors who have increasingly embraced passive investing. It serves as a cautionary reminder that past performance is not indicative of future results, and that the "easy money" era might be over. It also puts pressure on fund managers to demonstrate their value proposition – proving they can consistently generate alpha in an increasingly competitive landscape.

Conclusion: A Call for Active Engagement

Vikas Khemani’s perspective represents a significant challenge to the prevailing wisdom surrounding passive investing in India. While passive strategies still have their place, his argument suggests that investors need to be more discerning and actively engage with the market if they want to achieve meaningful outperformance over the next decade. The onus is now on active managers to prove their worth and deliver alpha – a shift that could reshape the Indian investment landscape.

I hope this provides a comprehensive summary of the article. Let me know if you have any other questions or would like me to expand on any specific points!