With AI reading annual reports and passive investing taking over the US, should people move everything to index funds?

While index funds offer simple market returns, India's expanding economy means skilled active managers still have a long runway to add value, making a blended approach highly effective.

Index funds give you simple, low-effort market returns, but in India the room for skilled active managers to add value is likely to stay open for quite a while. In developed markets, a big trend is that the number of listed companies is shrinking as firms go private. Fewer opportunities in the listed market make it harder for active managers to beat the index, which is a big part of why passive investing took over there.

India is in a different place as a growing and capital-starved economy that will need a huge amount of risk capital for the next 30-50yr. As domestic money flows in, there is a steady stream of new listings and fundraising to absorb it, meaning the opportunity set keeps expanding rather than shrinking. A reasonable estimate is that India is at least a couple of decades away from a Western-style shift to passive dominance.

When considering what AI is actually changing, it helps to remember that investing has always been part art and part science. AI makes the science much more efficient by reading all the data and producing outputs quickly, but investing remains highly iterative. Someone still has to look at the output and decide what to tweak, especially from a risk management point of view.

The art lies in the culture of the investment team and how analysts debate the ideas the machine throws up alongside their own work. If every fund house uses similar AI tools and outputs start looking the same, the human judgment layer will actually become more important, not less. You can already see this in team sizes, where the industry has grown many times over but the number of fund managers has not grown anywhere close to that pace.

For a practical way to decide, ask yourself if you are comfortable judging an active fund's process and holding through phases when it lags. If yes, active funds can still have a strong place in your portfolio. If you would rather not evaluate managers at all, an index fund keeps things simple and lets you accept market returns with minimal effort.

Many investors use a mix of both based on their personal comfort levels. Whatever you choose, the bigger drivers of wealth creation will always remain how much you invest and how long you stay invested.

Based on Raghav's podcast with Sachin: https://foliyo.ai/blog/wealth-management-in-ai-era/
Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.