Passive Fund Flow significance: Retention and Materiality in Sep-26

PASSIVE FUNDS FLOW SIGNIFICANCE IN SEPTEMBER?

Passive Funds have seen a diverse trend in the month of September 2026. The overall net flows of ₹11,733 crore into passive funds does not tell you the contrast. Equity and commodity funds have seen strong inflows in the month, while debt funds have seen heavy selling. This can be attributed to the caution among investors due to the RBI raising rates by 25 basis points and hinting at another rate hike in December.

This dichotomy is captured when we look at the combination of flow retention and flow materiality. The ratio of net flows to gross flows into passive funds is a proxy for flow retention. The ratio of net flows to net AUM is a proxy for flow materiality. A mix of retention and materiality is a good measure of flow significance. Once passive funds are ranked on these 2 scores, the average score is taken for the final ranking below.

Data Source: AMFI (# NF – Net Flows; GF – Gross Flows)

METHODOLOGY - HOW WE RANKED PASSIVE FUND FLOWS

• Passive funds here include 3 categories as defined by AMFI; index & commodity-based funds, index & commodity-based exchanged traded funds (ETFs), and FOFs ETFs investing overseas. These passive funds avoid active investing; and are either benchmarked to an underlying index or to an underlying commodity benchmark.

• Passive funds were first ranked by retention, which is the ratio of net flows to gross flows. For passive funds as a whole, this retention ratio stood at 24.78% in September 2026, sharply lower than 29.97% in August 2026. This sharp fall in the retention ratio can be attributed to the heavy selling in debt funds and debt ETFs.

• Then these passive funds were ranked by materiality, measured by the ratio of net flows to net AUM. For passive funds as a whole, this materiality ratio stood at 0.67% in September 2026. This is flat compared to August 2026, and here again, the advantage comes from a depletion in the AUM due to weak market conditions.

• A combined rank for all passive fund categories for September has been obtained by taking an arithmetic average of the retention rank and the materiality rank, which gives a view of flow significance of passive funds. The overall rankings show a stark dichotomy between debt oriented passive funds and other passive funds.

INTERPRETING THE 3 LEVELS OF CLASSIFICATION IN SIGNIFICANCE RANK?

• Before the rankings were started, the funds that did not pass the base AUM test were removed from the last to avoid skewing the outcomes. For instance, fund categories with net AUM of less than ₹1,000 crore were removed from the rankings as the rankings tend to be biased in favour of small base numbers.

• Let us first talk about the top-4 in the light brown shade. These fund classes are the passive categories where the flows are the most significant in terms of the combined rank. These fund categories scored high on retention of flows and also scored high on materiality of flows.

• The top-4 funds by combined rank includes Gold ETFs, Silver ETFs, Equity ETFs, and Equity Index Funds. These four categories of funds had combined net inflows of ₹26,317 crore and a combined AUM of ₹12.89 trillion. While gold ETFs and silver ETFs continued to get good flows amid falling prices, equity ETFs and equity index funds continue to act as good proxies for active funds with lower implied costs.

• The bottom-4 shaded in light green are the cases where the flows are either not material or negative. Negative flows happen when the monthly redemptions in a particular category are more than the gross inflows. Obviously, 3 out of the 4 categories here scored negative on both the significance measures.

• These bottom-4 funds shaded in light green, represent funds that have generally been out of favour with the investors. These are either debt categories or passive categories investing overseas. Debt index funds and debt ETFs saw selling pressure due to concerns over more rate hikes by the RBI, which tends to suppress the price of bonds and the NAVs of debt funds. For global ETFs, it was more of an exchange risk.

• If one were to take a combined view of the passive fund categories, equity and commodity relative passives have scored high on flow significance. On the other hand, debt and global investing scored low on flow significance. This dichotomy has only got accentuated after the Fed hiked rates and the RBI also followed with a rate hike. For global ETFs, currency translation risks and restrictions are the spoilsports.

In the case of passive funds, the retention in September has been lower than August, while materiality has been flat. But the real story has been the sharp dichotomy within the passive funds between debt-oriented passives and non-debt passives. While equity and commodity passives scored; debt and global passives struggled!