Actively managed equity funds in India are finding it harder to beat their benchmark. For five-year return periods ending in 2025, large-cap schemes trailed the Nifty 100 Total Return Index (TRI) 41% of the time, according to a rolling return analysis based on data from Ace MF. Mid-cap funds lagged the Nifty Midcap 150 TRI in 69% of such periods.
Small-cap funds held up slightly better. In five-year periods ending in 2025, they underperformed the Nifty Smallcap 250 TRI 40.6% of the time. Over the years, small-cap schemes have shown more instances of outperformance versus their benchmark than large- and mid-cap funds have. (see: gfx)
Yet passive funds—index funds and exchange-traded funds (ETFs) that simply track a benchmark—account for barely one rupee in every six invested in Indian mutual funds.
Growth in passive funds has been overwhelmingly corporate-led: corporates held 73% of India's ₹12.92 trillion in passive assets as of December 2025, against just 8% for retail investors (Association of Mutual Funds in India). Domestic index funds and ETFs have grown nearly fivefold in five years, from ₹2.71 trillion in 2020, while investor folios grew almost ninefold, to 3.83 crore, over the same period.
Growing, but still small
Even after that surge, passive funds’ share of the mutual-fund industry’s total assets rose only from 8.75% in 2020 to 16.11% in 2025. A wealth manager, who has worked in India and now advises globally mobile Indians for a multinational bank, and who requests anonymity, puts it plainly: “Passive investing is still at a relatively early stage in India.”
That is a world away from the US, which is considered one of the most developed capital markets. There, passively managed open-end funds and ETFs held 54.8% of fund assets at the end of 2025, up from 42.5% in 2020, according to Morningstar data.
Forces at play
Underperformance is only part of the story. “Underperformance certainly contributed, but higher fees also play a part in the US,” says Zachary Evens, a manager-research analyst at Morningstar. “Actively managed mutual funds are, on average, more expensive than passive funds. Fees come directly out of returns, and investors have overwhelmingly preferred low-cost funds, which tend to be passive.”
Distribution economics can help to explain this to some extent. “Active funds generally pay higher commissions and trail income than passive funds,” the wealth manager pointed out. “Since passive funds simply replicate an index, the fund manager’s role is limited, and the expense ratio is much lower. Naturally, the commissions available to distributors are also lower,” he said.
“The biggest advantage of a fee-based advisory is that it can help to minimize product bias to some extent,” said Lovaii Navlakhi, managing director and chief executive officer of International Money Matters.
But the tide seems to be changing with the launch of fund houses that focus on passive funds. According to Vishal Jain, chief executive of Zerodha Mutual Fund, points out that investor behaviour has shifted in step with the products on offer. He identified three phases. The first was simple substitution: investors swapping individual stocks or expensive active funds for large-cap, diversified passive funds (ETFs/Index Funds). The second came as gold passive, target-maturity bond passive and products linked to international indices became accessible, and investors began “thinking about them as an efficient way to access multiple asset classes.” The result, Jain said, is that today’s retail investor is asking a different question entirely: not “which equity fund should I buy?” but “how do I allocate across domestic equity, international equity, debt and gold?”
Navlakhi frames the broader choice between active and passive not as binary but as a matter of core and satellite. Client portfolios, he says, are typically built in layers, with index funds “the first port of call” before money moves into other categories. He does not treat the split as fixed, however: in mid- and small-cap segments, he says, “fund-management skill tends to come to the fore, and information isn’t as uniformly available,” so his firm “largely favours actively managed funds in mid- and small-cap”.
Vishal Dhawan, founder of Plan Ahead Wealth Advisors, said investors may want to rethink their approach to mid-cap funds.
"Active fund managers are now finding it difficult to beat their benchmark indices as the depth and size of the market have grown considerably," said Dhawan. “Mid-cap stocks, which are the 101st to 250th companies by market capitalization, are now well-researched and tracked by both domestic and foreign institutional investors. That limits the scope for finding undiscovered ideas with high return potential.”
He suggested pairing an index strategy with an active one in this segment. "Investors could add a passive mid-cap allocation alongside their active funds, so they at least capture the benchmark return, while the active fund tries to generate alpha over and above that," Dhawan added.
Room for both
“There is less value addition in active large-cap funds,” conceded Manish Gupta, principal officer at Equinox Investment Advisors. “A case can be made to avoid their expense ratio in favour of passive funds.” But he drew a sharp line at the smaller end of the market: “Small-cap funds have a wider universe for the fund manager to create alpha from. Active funds in this category would continue to find favour.”
In the US, at least, the shift towards passive shows no sign of stopping. “Passive funds should continue to see growth since investors have a clear preference for low-cost passive funds,” said Evens. “But where growth will stop is unclear.” Whether passive investing’s growing dominance has itself made American markets more volatile, he argued, is doubtful: “There are still plenty of active managers in the market helping with price discovery. There are some effects at the margins around index rebalances, but overall, passive management has not had a meaningful impact on overall market volatility.”
India is not on the brink of a passive takeover. To be sure, there are still instances of large-cap funds outperforming their benchmark indices, Ajay Pruthi, Sebi Registered Investment Advisor, says, “Most investors have a job and family, in between that, spending time to research is not possible for the average investor. Therefore, it is harder for investors to pick consistent outperformers in the category.” The more plausible destination is not a winner-take-all market but one increasingly split by terrain: passive funds possibly gaining their hold over large, well-covered, efficiently priced segments—large-cap equity, while active managers retain a claim over less efficient corners of the market.
What should investors do?
When it comes to large-caps, the case for passive funds is stronger. The mid-cap segment is now showing similar signs—active funds here are increasingly failing to beat their benchmarks, as the universe of mid-cap stocks has become better researched and harder to find an edge in.
Pairing a passive allocation with an active one in large- and mid-caps locks in at least the benchmark return if the fund manager lags, while still leaving room for alpha if they deliver. With a far wider universe of stocks to pick from and less uniform information, active fund managers still have higher room to generate alpha in small-caps, but look for funds with a track record across different phases of market cycles.