Post-Pandemic Evolution of Passive Investing in India

Abstract

This research evaluates the dynamics of passive investment in India in the post-pandemic phase. In particular, the dynamics of returns, volatility and costs in a significant sample of ETFs (Exchange Traded Funds) for the period from 2020 -2025 are studied. The daily data is obtained from the National Stock Exchange and, through a structured econometric sequence of analysis - Augmented Dickey -Fuller Test (ADF), Vector Autoregression (VAR), Forecast Error Variance Decomposition (FEVD), GARCH/EGARCH - returns spillovers and volatility asymmetry dynamics are captured. The cost efficiency is studied by assessing the metrics of tracking difference (TD) and tracking error (TE). The results of the analysis indicate that return interdependence has grown in intensity across Indian equity ETFs, in particular the ETFs BANKBEES and MOM50, with the conclusion that post-COVID shocks to the markets are transmitted with considerable rapidity in the networks of the passive investment sector. The GARCH and EGARCH results yield (α + β ≈ 0.9) the persistent reduction in volatility, further indicating that negative returns increase risk more than do positive ones, in conformity with the asymmetric “leverage effects”. The results of the rolling volatility and correlation graphs from 2022 onwards indicate characteristics of gradual stability with improvements, thus indicating greater integration of markets and confidence on the part of investors. The results of the cost analysis reveal an average trend for TE in the region of 0.12 and TD of between –0.02 and –0.04. This demonstrates that the Indian ETFs have managed to sustain a lower error of representation with low TE costs of a high order in terms of the respective benchmark indices. The results yielded thus indicate that the pandemic was a significant catalyst for the real structural maturity of the passive investment sector in India. The ETFs have grown from being niche-type to being core vehicles for the portfolio needs of investors, with better transparency, liquidity, and durability with respect to features of global practice in the world of post pandemic financial markets.