Passive Mutual Fund- Factor Cost Investing & Jio BlackRock- Role

  

India is witnessing a huge growth in factor-based investing ( HYBRID OF Active & Passive)  style in the coming years. The rise of factor-based investing and the shift toward more frequent index rebalancing are reshaping India’s investment landscape.

 In India over the past 5–6 years, with assets under management (AUM) in factor strategies growing from ₹100 crore to ₹40,000, Factor-based investing, also known as smart beta, targets specific drivers of return, such as value, momentum, low volatility, or quality, through rules-based strategies.  Factor indices select and weight stocks based on characteristics like attractive valuations, price stability, or strong price momentum. The factor-based investing under the passive segment leads to significant growth aligned with the passive industry growth linked with the MSCI allocation increase.

India’s mutual fund industry, including passive funds, reached ₹69.5 trillion (~$813.8 billion) by May 2025. Passive funds, especially ETFs tracking the MSCI India and Nifty 50, have grown rapidly due to low costs (TERs of 0.19%-0.85%) and accessibility. MSCI rebalancings in 2025 drove significant passive inflows, with $2.5 billion in November 2024, $1 billion in February 2025, and $451 million in May 2025 from additions like Coromandel and Nykaa. These inflows reflect growing foreign institutional investor (FII) interest, with India’s MSCI EM weight surpassing China’s

Asia Index Private Limited, a wholly-owned subsidiary of the Bombay Stock Exchange (BSE), recently launched four new factor-based indices under the BSE 500 umbrella: BSE 500 Enhanced Value 50, BSE 500 Low Volatility 50, BSE 500 Momentum 50, and BSE 500 Quality 50.

These indices, introduced with quarterly reconstitution schedules, mark a significant step in aligning India’s financial markets with global trends in factor-based investing. Meanwhile, the National Stock Exchange (NSE) has been a pioneer in this space, with its

Nifty indices are already adopting quarterly rebalancing for several factor-based and thematic indices. This article explores the implications of factor funds, the rationale behind quarterly rebalancing, and their impact on passive investment strategies like ETFs and index funds in India as of 2025.

The Rise of Factor-Based Investing in India

The NSE has been ahead in this domain, with six factor-based indices—Nifty Alpha 50, Nifty High Beta 50, Nifty Low Volatility 50, Nifty 100 Alpha 30, Nifty 100 Low Volatility 30, and Nifty200 Alpha 30—already employing quarterly reconstitution. Additionally, seven thematic indices, such as Nifty IPO and Nifty REITs & InvITs, follow a similar schedule. In contrast, large-cap indices (e.g., Nifty 50, Nifty Next 50) and broader indices (e.g., Nifty 100, 200, 500) are rebalanced semi-annually, as are sectoral and some strategic indices.

Impact on Passive Strategies: ETFs and Index Funds

Factor-based indices serve as the backbone for passive investment vehicles like exchange-traded funds (ETFs) and index funds, which aim to replicate index performance at low cost. They also act as benchmarks for portfolio management services (PMS), mutual fund schemes, and other investment portfolios. The NSE dominates this space, managing 201 passive funds in India (183 equity ETFs with ₹6.66 lakh crore in AUM and 202 equity index funds with ₹1.70 lakh crore as of March 2025) and 13 funds tracking Nifty indices globally.

The MSCI India Index offers diversified exposure to India’s growth story, making it attractive for passive investors via ETFs (e.g., iShares MSCI India ETF). Its outperformance (12.79% annualised over 10 years) and resilience in 2025 make it a strong choice, though high valuations warrant caution. Coming days, Jio-BlackRock’s tech-driven approach and MSCI’s rebalancings will drive further inflows, but investors should monitor global risks (e.g., U.S. policy, dollar strength). The Jio-BlackRock joint venture, approved by SEBI in May 2025, is accelerating passive investing growth. Leveraging BlackRock’s Aladdin platform, it offers low-cost, tech-driven products like ETFs, targeting India’s 150 million retail investors and potentially disrupting traditional AMCs.