MF Flows: December Data Signals a Shift from Active to Passive Investing

December mutual fund flow data points to an important shift underway in investor behaviour. While market discussions often focus on returns or short-term volatility, fund flow trends usually tell a deeper story. The latest data suggests that investors are gradually moving away from purely active strategies and increasing their allocation to passive funds.

This shift is not abrupt, but it is becoming more visible. More importantly, passive investing this time is not limited to equity indices. It is increasingly being used as a tool for multi-asset allocation.

What December Mutual Fund Flow Data Is Telling Us

At an aggregate level, mutual fund flows in December 2025 were negative. This, however, is not unusual. Quarter-end outflows from debt funds are common as investors withdraw money to meet tax-related requirements.

Looking beyond headline numbers reveals a more meaningful trend.

• Active equity funds recorded net inflows of ₹28,054 crore in December.
• Passive funds saw net inflows of ₹26,723 crore, almost matching active equity flows.

This near parity between active and passive inflows is significant. Historically, active equity funds have dominated monthly inflow figures. December’s data suggests that investor preferences are becoming more balanced.

Active vs Passive: A Closer Look at the Numbers

Breaking down passive fund inflows provides further insight into where investor money is moving.

Out of the ₹26,723 crore that flowed into passive funds:

• Around ₹12,000 crore went into equity index ETFs and equity index funds.
• A larger ₹15,600 crore flowed into gold and silver ETFs.

This split is telling. While equity index investing remains important, the stronger flows into precious metal ETFs indicate that investors are using passive products for diversification rather than just equity market participation.

Traditional Reasons Behind the Shift to Passive Funds

Some reasons for increased passive investing are well known and have existed for years.

When markets become volatile or when generating consistent alpha becomes difficult, investors often reassess the value of active management. Passive funds become more attractive in such phases, especially when:

• Active strategies struggle to outperform benchmarks meaningfully.
• Market returns compress and cost differences become more visible.
• Investors prefer predictable market-linked returns over manager-dependent outcomes.

Performance trends in 2025 have reinforced this thinking.

• Gold delivered returns of around 70%.
• Silver delivered returns of nearly 150%.
• In comparison, the Nifty delivered returns of about 10.5%.

Passive funds, especially ETFs, allow investors to participate directly in such asset price movements without manager discretion or higher costs.

Cost is another important factor. As return expectations moderate, expense ratios play a bigger role in net outcomes. Passive funds, by design, keep costs low, which becomes more valuable in such environments.

The Bigger Driver: Shift Towards Multi-Asset Allocation

While traditional factors explain part of the shift, they do not fully capture what is happening.

The more structural change is the growing preference for multi-asset allocation.

Investors today are no longer satisfied with portfolios limited to equity and debt, with occasional exposure to gold. There is a clear move toward more balanced and diversified portfolios that include multiple asset classes in a systematic manner.

Hybrid fund flows in December 2025 provide an important clue.

• Total inflows into hybrid funds stood at ₹10,756 crore.
• Of this, ₹7,426 crore, nearly 70%, went into multi-asset allocation funds.

This concentration indicates that investors are consciously choosing products that offer exposure across assets rather than relying on ad-hoc diversification.

Why Passive Funds Fit Multi-Asset Strategies Well

Passive products are increasingly seen as efficient building blocks for multi-asset portfolios.

They offer exposure across a wide range of assets through simple structures:

• Equity and debt indices via index funds and ETFs.
• Gold and silver through dedicated ETFs.
• Global equities and bonds through fund-of-funds structures tracking international indices.

For investors looking to adopt a multi-asset approach, passive funds offer several advantages:

• Broad diversification without complexity.
• Lower costs compared to actively managed alternatives.
• Tax-efficient rebalancing within fund structures.
• Transparency in portfolio construction.

These features make passive funds particularly suitable for long-term asset allocation rather than short-term tactical moves.

What This Trend Means Going Forward

The December flow data should not be viewed as a one-off monthly anomaly. Instead, it reflects an evolving investor mindset.

Investors appear to be:

• Placing greater emphasis on asset allocation over security selection.
• Using passive funds as core portfolio components rather than satellite holdings.
• Looking beyond equity indices and using passive vehicles for commodities and global exposure.

This does not imply the end of active investing. Active funds will continue to play a role, especially in specific segments and strategies. However, passive funds are increasingly becoming the preferred choice for building diversified, cost-efficient portfolios.

Key Takeaways

• December mutual fund data shows passive inflows nearly matching active equity inflows.
• A large portion of passive flows is moving into gold and silver ETFs.
• Traditional drivers like cost and alpha challenges still matter.
• The bigger shift is toward structured multi-asset allocation.
• Multi-asset allocation funds captured nearly 70% of hybrid fund inflows.
• Passive funds are emerging as efficient tools for diversified, long-term portfolios.

Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or mutual fund schemes. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully and consider consulting a qualified professional before taking any financial decision.