While it's touted as one of the greatest investing hacks, it wasn't actually a hit when it was unveiled. It was called a 'complete flop' by bogle himself, and the industry called it 'Bogle's folly' with many treating indexing "un-American".

When the First Index Investment Trust was launched, the fund's initial goal of raising $150-million fell short by a long distance, managing only to garner just $11.3-million. This amount wasn't even sufficient to buy all the 500 stocks in the index and managed to buy just 280 stocks. The fund initially had a sales load as high as 6 per cent. Despite the initial setback, Bogle said to have emphatically claimed to have launched the world's first index fund, and it was just the beginning of something big.

A quarter century before the actual launch of the index fund, a young Bogle as a Princeton student wrote a thesis stating Mutual Funds can make no claim to superiority over the market averages. But the idea, at least, in action took a backseat till Bogle became the chairman of Wellington Management.

However, the so-called genius outcome (indexing) isn't the first choice even for Bogle. In 1960, he wrote an article using a pen name (John B Armstrong) for the Financial Analysis Journal titled, "The Case for Mutual Fund Management" to defend professional active management.

Back in 1966, to expand Wellington's reach, he gave up too much voting control to the new Boston partners. The cultural clashes and open hostility grew between the old and the new guards. When a severe bear market hit in 1973-'74, the combined firm suffered significant losses, prompting his four partners to vote him out.

Though he was fired as the Chairman of Wellington, he was still headingeleven of the Wellington MFs. The directors of the funds then set up a new administration company, the Vanguard, with Bogle as its CEO. So, rather than creating a for-profit company, Bogle and the fund directors structured the new fund to be owned by the funds themselves. The reason was well captured by his speech to the Colombia University School of Business in 2009 - The fiduciary principle: "No Man Can Serve Two Masters".

The logic is that the fund's primary service is towards its investors and not the owners of the Investment Management Company. This fund now garnered the trust of $1.67-trillion in assets while saving up to $570-billionfor the investors (through reduced costs)till the end of 2025. And a $15K investment in the fund at its launch could've turned into over $3.6-million today, a staggering 240 times in 50 years.

While it is an economical and convenient method of investing, it has its own drawbacks. Index investing is powerful precisely because it doesn't try to predict winners. But this is also its central limitation. An index is a rule-based representation of the market, not necessarily a portfolio of the best businesses or the best future opportunities.

So, a superior stock picker can avoid mediocre businesses and identify future winners earlier. As stock becomes more expensive, its index weight rises, that could make investors to allocate more to stocks that have appreciated. Due to the market-cap weighting, it usually creates bias towards momentum. It systematically allocates more capital to companies that have already become more valuable and less to companies that have become cheaper. Just by buying into an index doesn't mean buying at a reasonable valuation. Index investing isn't valuation agnostic.

As index can become expensive, you don't escape valuation risk.As passive funds must own constituents even when their valuations are extreme, it provides no ability to avoid bubbles. As index remains invested through the bear markets, it provides no downside protection. While index investing is considered as passive, it doesn't mean it's free from human judgement as the someone defines what qualifies as an index, its universe, weighting and rebalancing rules.

This is why benchmark selection matters enormously, for instance Nifty 50, Nifty next 50, equal-weight factor, etc. produce different outcomes. Even SEBI's own documentation makes this point quite clear: an index fund invests in the securities of the underlying index irrespective of market conditions, and its concentration and volatility are effectively those of the index, subject to tracking error.

An important paradox is index investing eliminates manager risk, but it also eliminates manager judgement. While this could be an advantage, circumstances where judgement adds value particularly in markets is those with substantial inefficiencies, rapid structural changes, governance differences or significant valuation dispersion.

India is actually a fascinating case for passive investing as the case for indexing is strong but case for blindly indexing is weak. This is because Indian market is not homogenous. The large caps are more institutionally more researched than mid- and small-caps. Also, historical evidence suggests that active management faced it difficult to outperform their benchmarks. The SPIVA India year-end 2025 report shows that 76.3 per cent of Indian large-cap funds underperformed their benchmarks over 10 years while only 12.1 per cent underperformed for just 2025, illustrating how much the opportunity set can vary across market segments.

While indexing solves the problem of 'which manager to choose', it doesn't solve the problem of valuation, concentration, market structure, regime change or asset allocation. The degree of opportunity for active management isn't uniform across the Indian market. The potential case for active becomes stronger as you move down the market-cap spectrum, where information asymmetry and dispersion increase. So, investors should be judicious in having a suitable mix of passive and active styles of investing to generate long-term wealth accumulation.

(The author is a partner with "Wealocity Analytics", a SEBI registered Research Analyst and could be reached at info@wealocityanalytics.com)