Why passive funds are hiring more to mimic benchmark indices better

The bigger teams, small even after expansion compared to active funds, are helping passive fund managements create separate verticals, launch more products, and mirror better the indices they want to track.

This relative performance is measured by a metric called tracking error, which in statistical terms is the percentage difference of standard deviation between the fund and the index—essentially checking how closely a fund’s performance mimics that of an index.

An increase in team sizes has led to reduced tracking errors for such passive funds.

Passive fund management is not fully automated and requires human intervention for rebalancing, deployments and execution. As product count rises and pressure on a single person increases, the risk of operational and tracking errors rises.

The passive side of an AMC is relatively smaller than its active side. On average, there is a five-member team on core operations for passives versus a 20-member team on the active side.

Bigger size, more hirings

The hiring in passive teams is more pronounced at larger fund houses; the hirings have been in core operations and sales to scale business, managers said.

ICICI Prudential Mutual Fund, with assets worth ₹11.3 trillion as of December end, has strengthened its passive investing platform by expanding its passive dealing desk, enhancing its on-ground sales presence to support exchange-traded funds (ETFs) and index funds across its distribution network, and building focused product capabilities.

The results are showing: ICICI Prudential’s Nifty 50 ETF at one point in December 2020 had a tracking error of 0.33%. Five years down the line it has a tracking error of 0.02% in December 2025.

Translated into returns an investor redeeming ₹2 million worth of units in an ETF five years ago would have received ₹6,600 less than if the fund had exactly tracked the index it was tagged to; the difference would have reduced to ₹200 now.

“An expansion in team resources has helped lower tracking errors in passive funds,” said Chintan Haria, principal – investment strategy for ICICI Prudential AMC.

ICICI Prudential Mutual Fund had around 35 people in its passive team in FY24. The team size has increased to about 45 in FY26 so far.

It has added passive product specialists across top locations and a dedicated team of service managers for customer service and transaction handholding for customers.

Aditya Birla Sun Life Mutual Fund, with assets worth ₹4.4 trillion, has also added six more people to its passive team.

Likewise, at Mirae Asset Investment Managers (India) managing ₹2.9 trillion, more people have been added to the passive team, including ETF specialists. Roles are now more focused, rather than having one person do multiple jobs on the passive side, said Umesh Kumar Daila, its head-ETF Sales. Mirae’s passive team now has 18 people, compared to 10 a year ago.

Business development, too

DSP Mutual Fund, which manages ₹2.2 trillion in assets, has always had a separate team for passive funds, with a fund manager, dealer, dealing room, and Bloomberg terminals for research.

Anil Ghelani, head of passive investments and products at the fund, said that over time, business development was folded into the team. “The sales team remains common, but there is a separate, dedicated passive business team which comes in to explain the passive side whenever needed,” he said.

The passive vertical at DSP Mutual today has a five-member investment team and a 10-member business team, including senior leadership and city-level specialists across Mumbai, Delhi, Bengaluru, Pune, Ahmedabad and Kolkata.

To further focus on whether tracking errors have reduced with more resources, Mint looked at the ETFs with the highest AUM within each AMC in recent years of volatility and a cooling market.

There was no clear trend.

The tracking error for ICICI Prudential’s Nifty 50 ETF was 0.04% in December 2023, which has now reduced to 0.02% as of December 2025. For Mirae Nifty 50 ETF, the tracking error was 0.04% and 0.02% in the same periods.

For DSP Nifty 50 Equal Weight Index Fund, the tracking error has remained the same at 0.4% in December 2023 and December 2025.

In the case of the Aditya Birla Nifty 50 ETF, the tracking error widened from -0.01% to -0.05% over the same period. A negative tracking error can arise when an ETF underperforms its benchmark or when adjustments are made regarding dividend payments or cash management.

Overall traction in passives

The new additions to talent come at a time when passives have grown significantly as a share of the mutual fund industry.

In the last five years, passive assets under management (AUM) have grown from 7.3% of the total mutual fund assets to 18% as of December 2025. Passive mutual fund AUM stands at ₹14.57 trillion, according to the Association of Mutual Funds of India (Amfi).

Even product launches and total number of folios (or accounts) on the passive side have seen a sharp rise.

“In the last decade, besides a few players, the segment may not have been large enough for most AMCs to justify separate resources, but changes to scheme benchmarking norms and categorisation, followed by covid-led market shifts, triggered strong flows into passive products,” Vishal Jain, chief executive officer at Zerodha Fund House.

AMCs view passives as a standalone opportunity, leading them to set up dedicated teams to manage and service the growing investor base, Jain added.

The growth in passives also comes at a time when active mutual funds continue to deliver lower alpha against the benchmark. Over 80% of large-cap funds failed to outperform their benchmarks over the five years through H1FY25, as per the latest S&P Global SPIVA report. Around 60% of mid- and small-cap funds underperformed the benchmark in the same period.