This expert thinks active mutual funds have an edge in volatile markets

India’s passive investing wave is growing fast, especially in small-cap, mid-cap, and thematic mutual funds. But Arihant Bardia, CIO and Founder of Valtrust, believes active funds remain crucial for these riskier segments.

“The growing popularity of passive investing has brought welcome attention to cost-efficient strategies,” Bardia says. “But when it comes to volatile categories like small & mid-caps or thematic sectors, active funds remain critical.”

He says these segments are structurally complex and carry high risk. “Small and mid-cap companies often face sharper business cycles, limited scrutiny, and inconsistent governance,” he explains.

By design, passive funds must follow index weights. This means buying more of stocks that may already be expensive.

“This momentum bias can amplify downside risk,” Bardia says.

Why active mutual funds matter in a downturn

Bardia says market downturns reveal the real difference between active and passive strategies. “Passive funds cannot shift allocation or avoid stocks when fundamentals weaken,” he says.

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Small and mid-cap segments can see drawdowns of over 50%, wiping out years of gains.

“Active funds, in contrast, can reduce exposure, pivot to resilient sectors, or hold cash to cushion the blow,” he says.

In April 2025, mutual funds held more than ₹2.15 lakh crore in cash.

“That strategic position is only possible for active managers,” he says.

Understand volatility and avoid panic

Bardia advises investors to factor in volatility when building portfolios. “Volatility shows how much risk you carry, financially and emotionally,” he says.

While small and mid-cap stocks can deliver strong returns, they are cyclical. “Meaningful allocation must have active oversight. Ignoring volatility leads to panic exits or excess risk-taking,” he says.

He highlights four key checks: Performance adjusted for volatility, fund manager agility, diversification, and liquidity discipline. “This layered approach helps investors tap growth while avoiding risks that static models often carry,” Bardia says.

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