If you are investing in mutual funds, you may have noticed a simple trade-off: active funds usually cost more, while passive funds typically charge lower expenses. But does paying a higher expense ratio actually mean you are getting better returns, better fund management, or greater value as an investor?
Active mutual funds rely on fund managers to select stocks, adjust portfolios, and attempt to outperform a benchmark. Passive funds, on the other hand, largely follow an index and aim to deliver returns in line with it, with a much lower expense ratio than active funds.
This makes the comparison more than just a question of “active vs passive” — it is really about whether the additional cost of active management translates into enough additional returns to justify the fee.
At the same time, a low-cost passive fund is not automatically the better choice in every category, while an actively managed fund does not necessarily justify its higher cost simply because it has a higher expense ratio.
So, are you really getting more when you pay more for an active mutual fund? Or are you sometimes paying for the possibility of outperformance that may not materialise after accounting for costs?
Active vs passive funds: A comparison across large cap, mid cap and small cap categories
| Active Funds | 6 month returns in % | 1 year returns in % | 3 year returns in % | 5 year returns in % |
| Large Cap Funds | -0.46 | 2.5 | 11.07 | 9.77 |
| Mid Cap Funds | 9.83 | 12.11 | 18.73 | 16.4 |
| Small Cap Funds | 16.8 | 14.66 | 17.04 | 16.61 |
| Passive Funds | 6M | 1Y | 3Y | 5Y |
| Large Cap | -3.73 | -0.4 | 8.51 | 8.73 |
| Mid Cap | 7.35 | 11.28 | 17.83 | 17.36 |
| Small Cap | 14.67 | 9.33 | 16.63 | 14.97 |
Source: ACE MF
If we compare active and passive equity funds, we see that active funds have clearly outperformed passive funds across different time periods.
Over five years, active large-cap funds outperformed passive funds by 1.04%, while active small-cap funds outperformed by 1.64%. Mid caps were the only exception, as passive funds outperformed by 0.96%.
The three-year performance looks stronger for active management, with all active market cap funds outperforming the passive funds. Active large-cap funds outperformed passive funds by 2.56%, active mid-cap funds by 0.90%, and active small-cap funds by 0.41%.
If we look at the short term as well, active funds were ahead across all three categories over one year and six months. What matters here is that the outperformance is very consistent, as active funds are not relying on one strong category or one short period to generate alpha.
They have stayed ahead across market cap segments and over different time periods, with the strongest long-term advantage coming through in small caps.
Which category and time period saw active funds outperforming the most?
Small-cap funds have seen the strongest active outperformance, mainly over the one-year and five-year periods. Over one year, active small-cap funds delivered 14.66% versus 9.33% for passive funds, while over five years they returned 16.61% compared with 14.97%.
If we look at CY-wise returns for the past few years as well, we see the same case where small caps have outperformed. Since 2018, active small-cap funds have outperformed Nifty Smallcap 250 in 8 of 9 years. This edge was even stronger in 2020, when active funds returned 28.97% versus 24.19%, and in 2022, when they delivered 1.13% while the index fell by -3.65%.
Even in 2025, when the category was showing weak performance, active funds fell 5.30% compared with a 6.83% decline for the index. Hence, this consistency, where up moves are amplified while down moves are dampened, acts as evidence of active managers adding real value.
| Benchmark | 6 months performance in % | 1 year performance in % | 3 year performance in % | 5 year performance in % |
| NIFTY 100 | -2.0188 | 1.3575 | 9.6852 | 8.8639 |
| NIFTY 50 | -4.2215 | -0.9078 | 7.8625 | 8.0923 |
| Nifty Midcap 150 | 7.5625 | 11.7341 | 18.3225 | 17.669 |
| Nifty Smallcap 250 | 14.8709 | 9.792 | 17.2587 | 15.6795 |
Source: ACE MF
Active vs passive mutual funds performance
The table below compares the performance of active and passive funds across the large-cap, mid-cap and small-cap categories offered by top AMCs.
| Large cap active funds performance | 6 months returns in % | 1 year return in % | 3 year return in % | 5 year return in % | Expense ratio |
| HDFC Large Cap Fund(G) | -1.778 | 2.257 | 10.6976 | 12.081 | 1.56 |
| ICICI Pru Large Cap Fund(G) | -2.6043 | 0.4752 | 12.5809 | 12.2964 | 1.51 |
| SBI Large Cap Fund-Reg(G) | -0.4102 | 3.9897 | 10.3928 | 10.2364 | 1.51 |
| Large cap passive funds performance | |||||
| HDFC Nifty 50 Index Fund(G) | -3.6619 | -0.2057 | 8.6797 | 8.9047 | 0.45 |
| ICICI Pru Nifty 50 Index Fund-Reg(G) | -3.6462 | -0.1986 | 8.6704 | 8.8959 | 0.46 |
| SBI Nifty Index Fund-Reg(G) | -3.6698 | -0.2563 | 8.5807 | 8.8029 | 0.46 |
| Mid cap active funds performance | 6 months returns in % | 1 year return in % | 3 year return in % | 5 year return in % | Expense ratio |
| HDFC Mid Cap Fund-Reg(G) | 5.7764 | 11.8771 | 19.6041 | 20.1218 | 1.31 |
| ICICI Pru Midcap Fund(G) | 9.2155 | 18.8078 | 23.2072 | 18.0556 | 1.86 |
| SBI Midcap Fund-Reg(G) | 5.0023 | 8.6979 | 12.7508 | 14.35 | 1.82 |
| Mid cap passive funds performance | |||||
| HDFC NIFTY Midcap 150 Index Fund-Reg(G) | 7.4342 | 11.425 | 17.7701 | 0.83 | |
| ICICI Pru Nifty Midcap 150 Index Fund-Reg(G) | 7.3654 | 11.3053 | 17.7139 | 1.1 | |
| SBI Nifty Midcap 150 Index Fund-Reg(G) | 7.5772 | 11.6322 | 17.9628 | 0.88 | |
| Small cap active funds performance | 6 months returns in % | 1 year return in % | 3 year return in % | 5 year return in % | Expense ratio |
| HDFC Small Cap Fund-Reg(G) | 5.1199 | 1.6146 | 12.2682 | 15.2968 | 1.54 |
| ICICI Pru Smallcap Fund(G) | 9.0251 | 5.9305 | 12.4702 | 14.3747 | 2.1 |
| SBI Small Cap Fund-Reg(G) | 14.0495 | 10.231 | 12.7328 | 14.6661 | 1.57 |
| Small cap passive funds performance | |||||
| HDFC NIFTY Smallcap 250 Index Fund-Reg(G) | 14.6961 | 9.3731 | 16.6276 | 0.79 | |
| ICICI Pru Nifty Smallcap 250 Index Fund(G) | 14.6184 | 9.2615 | 16.6057 | 0.98 | |
| SBI Nifty Smallcap 250 Index Fund-Reg(G) | 14.7223 | 9.3979 | 16.6811 | 0.86 | |
Source: ACE MF
Where did passive funds outperform active funds?
There are pockets where passive funds have outperformed active funds due to different parts of the market cycle, but the extent is very minor.
“If we look at calendar-year returns from 2016 to 2026, passive funds have had stronger years when broad index performance was strong, while active funds have led in most of the other years. One important thing to note is that investors should not look only at the overall category performance but also at fund-wise performance,” said Manish Srivastava, Executive Director, Anand Rathi Wealth.
This will help you understand how individual funds compare to the passive index because there will always be funds that outperform or underperform at any given point.
“For example, in mid caps, 12 out of 27 funds outperformed the passive index over five years, even though the overall active category underperformed. This is why it would be helpful to look at individual fund performance rather than generalising from the overall category-level result to understand if the fund manager is delivering alpha,” Srivastava further added.
Do active funds justify higher fees?
Active diversified equity funds charge an average expense ratio of around 2.16%, compared with 0.60% to 1.05% for passive funds, depending on the type of passive fund. Investors therefore pay around 1% to 1.5% more each year for active management.
And, yes, the higher cost makes sense when a fund manager generates enough alpha, or returns above the index, to cover the additional expense.
Active management comes down to fund managers having the freedom to select stocks and avoid weaker companies, so the real question is whether those decisions add enough value to offset the higher fee.
Hence, we can see that active funds have generated meaningful additional returns across most of the periods and categories.
Do lower costs mean better returns?
Passive funds have a clear cost advantage, but the lower fee has not translated into better returns across most categories and periods. Active funds have generally generated enough additional return to make up for their higher cost, which means investors are getting compensated for the fees through higher returns.
Is active management worth it?
Active funds have outperformed passive funds across most categories and time periods, including both the short and long term. Investors can thus justify paying a higher expense ratio as fund managers are producing better results through their active management.
While investing in passive funds is cheaper, this lower cost has not translated into better returns.
Hence, investors should focus on building a portfolio based on active funds that consistently deliver better returns after costs, and look at the overall picture in terms of their strategy rather than choosing a fund simply because it has the lowest expense ratio.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
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