Veteran investor and market expert Vikas Khemani believes that investors relying only on index funds may be missing out on some of the biggest wealth creation opportunities in India.
According to Khemani, index investing works on the principle of buying market leaders after they have already achieved significant scale. Since companies enter major indices only after becoming large, profitable and widely recognised, passive investors often participate after a substantial part of the growth journey is already over.
He argues that in a rapidly transforming economy like India, where new sectors and companies are emerging, active investing can potentially capture opportunities much earlier.
Index Entry Often Comes After Massive Wealth Creation
Khemani highlights that several successful companies entered benchmark indices only after delivering exceptional returns.
For example, stocks such as Axis Bank and Infosys created enormous wealth before becoming index heavyweights. By the time they became part of major indices, investors tracking only the index had already missed the early growth phase.
The argument is that a company’s journey from a smaller emerging business to an index constituent can create the maximum returns, but passive investors usually enter only after the company has matured.
India’s Growth Story Needs Stock Selection
Khemani believes India is in a phase of structural economic transformation, with multiple themes creating new winners across sectors such as manufacturing, technology, financial services, infrastructure and consumer businesses.
In such an environment, he believes there is a stronger case for identifying future leaders rather than simply owning today’s largest companies.
The core idea is that yesterday’s winners become tomorrow’s index constituents — but the biggest returns are often made before a company becomes a recognised market leader.
Passive Investing vs Active Investing Debate
Index funds have gained popularity globally because they offer low costs, diversification and a simple way to participate in market growth. However, critics of passive investing argue that indices are backward-looking because inclusion is based on past performance, market capitalisation and liquidity.
Khemani’s view is that investors who only follow indices may own proven companies but may miss the next generation of market leaders.
India’s evolving economy has historically produced several companies that moved from being relatively unknown businesses to becoming large-cap leaders. Finding these companies early requires research, patience and active investment decisions.
The Bigger Investment Lesson
The debate is not just about index funds versus active funds; it is about where investors want to capture returns.
Index investing focuses on owning established winners, while active investing attempts to identify future winners before they become widely recognised.
Khemani’s message is that in a high-growth economy like India, opportunities may exist beyond the current index constituents, and investors who look beyond today’s leaders may discover tomorrow’s champions.
Vikas Khemani says investing in Index Funds is not a good idea because by the time a stock enters the Index, it has already run up a lot. Stocks like Axis Bank & Infy were up 30x to 85x before they entered the Index. These big opportunities are missed if one invests only in Index https://t.co/wEwSsOBB6N pic.twitter.com/c4n4GejqQ7
— RJ Stocks (@RakJhun) December 23, 2025
