Mid-cap funds emerged as an outlier, with passive funds returning 3.9 per cent compared with 3.3 per cent for active funds
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Active mutual funds across most categories continue to outperform their passive counterparts, even as returns begin to moderate. Around half of the active funds in outperformed passive funds over one-year, three-year and five-year periods, according to Morningstar.
In the large-cap category, annualised returns declined to 3.2 per cent for active funds and 5.6 per cent for passive funds over a one-year period. The three-year trend shows active funds delivering 10.7 per cent returns and passive funds recording 8.5 per cent. Similarly in the first year, active small-cap funds generated returns of 3.6 per cent, while passive funds failed to deliver any gains registered a decline of 0.2 per cent. However, the trend reversed for mid-caps. Mid-cap funds emerged as an outlier, with passive funds returning 3.9 per cent compared with 3.3 per cent for active funds.
“Active is in play because of the number of opportunities that are still alive, and a lot of these opportunities are outside the index, whether it’s large-cap, mid-cap or small-cap,” said Swarup Mohanty, Vice Chairman and CEO of Mirae Asset Investment Managers.
Performance Gap
However, returns slowed after the three-year period, and the performance gap between active and passive funds narrowed over five years. By the 10-year mark, returns had largely converged, with active large-cap funds delivering 12.2 per cent and passive funds 12.3 per cent.
Similar trends were visible in mid-cap and small-cap funds. For a 5-year return, the gap was just 50 basis points (bps) in mid-cap funds, with active funds delivering 17.4 per cent and passive funds 17.9 per cent. In the small-cap category, active funds returned 17.5 per cent compared with 15.6 per cent for passive funds.
“Active funds can also take off-benchmark exposure. Well-managed funds can create outperformance through superior stock and sector selection. We see this being successfully executed, particularly in volatile market conditions or when benchmark returns are not driven by just a handful of index heavyweights,” said Kaustubh Belapurkar, Director, Manager of Research, Morningstar India.
While some industry participants point to the clear advantages enjoyed by active managers, others argue that the trend reflects the structural characteristics of the market rather than any inherent superiority.
Active & Passive Fund
Active fund managers have the potential to outperform because they seek to identify the best-performing stocks while avoiding the worst, said Anil Ghelani, Head of Passive Investments at DSP Fund Managers. According to him, the wide dispersion in stock returns over the past two years has created conditions in which active managers can generate alpha, though passive funds can still outperform in specific market environments.
Active fund managers, however, face constraints arising from regulatory categorisation, said Mohanty, and this is where passive funds have an advantage. “Passives have no limitation in ideation. They can go on launching new ideas,” he said.
Asked whether investors should choose between active and passive strategies given that returns converge over a 10-year horizon, Belapurkar said investors who are comfortable evaluating fund managers and stock-selection strategies may prefer active funds, while those who are not may be better served by passive products.
Published on October 2, 2026