The share of money with Exchange-Traded Funds, or ETFs, out of the total AUM of mutual funds has either fallen or been stagnant during the last seven months, data from mutual fund body AMFI has shown, as some investors moved money to other categories to eke out better returns. However, money managers are not calling this trend a reversal, and see significant traction in ETFs as a passive mode of investment.
Between January 2024 and January 2025, the share dropped from 12.8% to 12.2% even as fund houses continued to launch ETFs. More importantly, the share has either stagnated or declined for the past seven successive months starting July 2024.
Experts attribute this dip to 'butterfly investors' while referring to retail participants who move funds swiftly between different categories of schemes based on momentum trying to maximise their gains.
Soumya Sarkar of Wealth Redefine, an AMFI-registered mutual fund distributor, said that many retail investors enter ETFs when markets are performing well and exit when returns start to decline.
"Since the market has not been generating the expected returns, participation in ETFs may have temporarily reduced. This does not indicate a structural decline but rather a reaction to short-term market conditions," Sarkar explained
Sachin Jain, Managing Partner, Scripbox, another AMFI-registered mutual fund distributor, has a similar view. He says that passive investments have remained largely stable, and the decline in ETF market share should not be looked upon as a trend reversal.
"The past year saw a shift toward sectoral and thematic funds, which absorbed a large portion of inflows. Additionally, gold investments gained traction towards the year-end, diverting funds from traditional ETFs," he said.
AMFI's data for January showed gold ETFs received inflows of Rs 3,751 crore while other ETFs saw inflows of Rs 1,172 crore. In December, non-gold ETFs saw outflows of Rs 4,458 crore.
Meanwhile, a recent report DSP Mutual Fund stated that in 2024, passive funds made up over 50 percent of new fund offerings (NFOs), with 44 ETFs and 90 index funds. Data from Prime MF also showed ETF AUM surged from Rs 5.14 lakh crore in January 2023 to Rs 8.05 lakh crore in January 2025, while the number of ETFs rose from 161 to 234.
Anil Ghelani, Head of Passive Investments and Products at DSP Mutual Fund remains very optimistic about the ETF space and doesn’t see this as a case of butterfly investors. He reiterated the need to look at the granular details.
"Equity-oriented ETFs, such as Nifty and Bank Nifty, continued to grow. Commodity ETFs, such as gold and silver, saw significant traction. However, fixed-income ETFs declined due to tax revisions that reduced investor interest in the segment," said Ghelani.
The Bharat Bond ETF had not issued any new series, while existing series has matured as per their cycle and that could be a reason that the portion of ETF investments may have declined, he added.
"ETF market share will gradually increase, potentially reaching 25 percent in the next three to five years," he said.
Global trends and temporary shifts
A similar pattern is visible among global investors. According to the latest Morningstar Offshore Fund Spy report, India-focused offshore funds and ETFs saw a net outflow of $954 million in Q4 2024 after nine consecutive quarters of inflows.
However, annual inflows in 2024 reached a record $23.4 billion, suggesting that the recent dip is likely a temporary adjustment.
Himanshu Srivastava, Associate Director of Research at Morningstar, pointed out that foreign investors often use ETFs for quick entry and exit during periods of market uncertainty.
"ETFs provide lower costs and greater liquidity, making them an attractive vehicle for investors wanting exposure to India without committing to long-term positions," he said.
Growing Options and Portfolio Strategy
The perception that actively-managed funds outperform ETFs could also be influencing investor decisions. "In portfolio construction, both ETFs and actively managed funds have a role," said Srivastava. "ETFs provide stability, whereas actively managed funds aim to beat the benchmark. The decision ultimately comes down to an investor’s risk appetite and market outlook."
"Small-cap, mid-cap, and large-cap funds outperformed indexes over the last few years, attracting investors. This growth in active funds made ETF expansion less noticeable in percentage terms, even though the absolute number of ETFs and their AUM increased significantly since 2020," he said.
As of February 19, the top-performing ETFs included Nippon ETF Hang Seng BeES (52.64 percent one-year return), LIC MF Gold ETF (38.12 percent), and Motilal Oswal NASDAQ 100 ETF (31 percent). The average ETF returns stood at 26.09 percent for one year, 21.16 percent for three years, and 16.75 percent for five years.
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