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What is the story about?
Active equity mutual funds in India have outperformed passive alternatives in several categories over shorter periods, but the picture changes over longer investment horizons. Morningstar India's first active-passive study found that success rates vary sharply across market segments, with mid-cap funds struggling over longer periods even as small-cap funds have delivered stronger results over five years.
The study, based on data as of June 30, 2026, found that around 50% to 60% of assets in active equity funds outperformed their passive counterparts over recent periods. The proportion fell to about 40% over 10 years. However, the 10-year analysis covered only large-cap and banking and financial services funds because there were not enough passive funds with sufficiently long track records in other categories.
In an interview with CNBC-TV18, Kaustubh Belapurkar, Director and Manager of Research at Morningstar India, explained why active fund performance differs across categories, what is driving the results and how investors should approach the choice between active and passive strategies.
Why Morningstar compares active funds with passive alternatives
Morningstar's study differs from a straightforward comparison between actively managed funds and market indices. It compares active funds with passive funds that investors can actually buy, such as index funds and exchange-traded funds (ETFs).
An index is a benchmark, not an investment product. Investors can gain exposure to it through a fund, but their actual returns are affected by expenses and tracking errors. Comparing active funds with investable passive alternatives therefore gives investors a more practical basis for assessing performance.
"The benchmark is what it is, but it is investable only if there's a passive option, such as an index fund or an ETF, that the investor can buy," Belapurkar said.
The study also uses an asset-weighted measure rather than simply counting how many funds outperform. This distinction matters because a category in which half the funds beat their passive counterparts may have a much higher or lower proportion of assets in outperforming funds, depending on the size of those schemes.
The analysis also accounts for differences between passive strategies within a category. In large caps, for instance, passive funds track indices such as the Nifty 50, Sensex, Nifty 100, BSE 100 and Nifty Next 50. These indices cover different groups of stocks, while the availability and track records of funds tracking them vary.
Active funds: India fares better than the US, but the long-term picture is less encouraging
Around 50% to 60% of assets in active equity funds outperformed passive counterparts over recent periods, according to Morningstar's analysis. Over 10 years, the figure fell to about 40%, although this comparison was restricted to large-cap and banking and financial services funds.
The results look more favourable when compared with the US, where active large-cap strategies typically have success rates of just 5% to 10%. Even in mid-cap and small-cap categories, the proportion of active managers beating passive funds in the US is generally between 15% and 30%.
Belapurkar said India's results indicate that active management continues to find opportunities, but the scope for generating outperformance is narrowing.
"The number of funds, or the potential for alpha, is coming down," he said.
The category-wise results show why investors need to look beyond an overall success rate. Large-cap funds have benefited from recent differences in index performance, mid-cap funds have found it harder to outperform over longer periods, and small-cap funds have produced a stronger five-year record.
Large-cap funds: Why recent outperformance may not last
Active large-cap funds have recorded strong success rates over shorter periods. Around 85% or more outperformed passive counterparts over one and three years. The proportion fell to about half over five years and roughly a quarter over 10 years.
Belapurkar attributed the recent performance partly to the divergence between the Nifty 50 and Nifty Next 50. Over the one- and three-year periods discussed, the difference in returns between the two indices was around 800 to 900 basis points.
Most passive large-cap assets are concentrated in funds tracking the Nifty 50 or Sensex. Active managers, however, can take positions across a broader set of stocks, including companies beyond the biggest index constituents. They can also underweight heavyweight stocks when they believe other opportunities offer better returns.
Some large-cap funds have additional flexibility to invest up to 20% of their portfolios in smaller mid-cap stocks. While not every fund uses this option, it can give active managers another way to differentiate their portfolios from passive benchmarks.
The advantage has been less pronounced over longer periods. Belapurkar said the difference in returns between the Nifty 50 and Nifty Next 50 was more limited over the 10-year period, leaving active managers with less scope to benefit from the divergence that helped them in more recent years.
The contrast between the short- and long-term figures underlines why a strong recent performance record alone may not be enough to establish whether an active large-cap fund can consistently outperform passive alternatives.
Mid-cap funds: More money, fewer undiscovered opportunities
Mid-cap funds have delivered weaker results over longer periods. Morningstar's study found that 60% of active mid-cap funds outperformed passive counterparts over one year. The success rate fell to 41% over three years and 33% over five years.
The findings challenge the assumption that mid caps necessarily offer active managers greater opportunities to generate alpha through stock selection.
Belapurkar said the segment is no longer as undiscovered as investors might expect. Significant amounts of money have flowed into mid-cap stocks, while flexi-cap and large-and-mid-cap funds also invest in the same segment. This means more capital is competing for opportunities within a relatively limited universe.
Mid-cap stocks are defined as those ranked from 101st to 250th by market capitalisation, leaving 150 companies in the category at any given point. But the composition of the group changes as companies move in and out of the segment.
Belapurkar cited data on the Nifty Midcap 150 index showing that around 240 to 250 stocks had been part of it at some point over the preceding three years. Fund managers must navigate these changes while maintaining at least 65% of their portfolios in mid-cap stocks.
The combination of a limited universe, significant investor interest and changing stock composition makes it harder to identify companies that will consistently outperform. Morningstar could not provide a 10-year comparison for the category because passive mid-cap funds did not have sufficiently long track records.
Small-cap funds: Active management holds up over five years
Small-cap funds show a different pattern. Morningstar found that 93% of active small-cap funds outperformed passive counterparts over one year. The success rate dropped to 29% over three years before rising to 75% over five years.
Belapurkar attributed the weak three-year figure partly to the performance of a couple of large small-cap funds. Since assets in the category are concentrated in a handful of large strategies, their performance can have a significant effect on the overall results.
He said the five-year figure offered a more encouraging indication of the opportunities available to active managers. Small caps have a wider range of companies with differing business prospects and greater dispersion in returns within the index. This gives fund managers scope to select companies based on management quality and growth potential.
"The small-cap segment is larger, and small caps are more undiscovered. There's also greater dispersion in returns within the index," Belapurkar said.
The five-year result suggests that active stock selection can still make a difference in this category. However, the sharp variation across the one-, three- and five-year periods also shows how much reported success rates can depend on the investment horizon and the performance of larger funds.
Flexi-cap funds: A mixed picture
Flexi-cap funds, which can invest across market capitalisations, also produced mixed results. Around 60% of active flexi-cap funds outperformed passive counterparts over one year, while the proportion stood at 56% over three years.
That means a substantial proportion of active funds failed to beat their passive alternatives even in a category where managers have considerable flexibility over where to invest.
The figures offer no guarantee that a fund's flexibility will translate into outperformance. The investment approach, the market environment and the period being assessed all matter.
What should investors do?
Belapurkar cautioned investors against assuming that an actively managed fund will outperform simply because they remain invested in it for a long time. A fund can go through periods of underperformance because its investment style is out of favour or because the sectors in which it invests take longer to recover.
Investors need to understand a fund manager's approach and assess whether they can remain invested through such periods. Selling a fund because of short-term underperformance and moving into whichever fund has recently performed best can undermine long-term investment goals.
"If you think you cannot discipline yourself to stay invested through such periods, either work with an adviser or simply buy a passive fund," Belapurkar said.
Passive funds offer investors market exposure without relying on a manager's stock-selection decisions. Active funds may suit investors who are willing to evaluate managers, understand their investment processes and tolerate periods when their strategies lag the market.
Belapurkar highlighted three active funds worth watching: DSP Large Cap Fund, HDFC Mid-Cap Fund and UTI Flexi Cap Fund.
He pointed to changes in the management and investment process at DSP Large Cap Fund, the stock-selection record of HDFC Mid-Cap Fund manager Chirag Setalvad, and the quality-growth approach followed by UTI Flexi Cap Fund manager Ajay Tyagi.
The UTI fund has faced headwinds because value investing and public sector undertakings have come into favour, while those areas do not necessarily form part of its investment approach. Belapurkar said the contrarian call could take time to work out, rather than delivering results within six months or a year.
The study's central message is that investors should not assume that active funds will automatically justify their higher fees, nor that passive strategies are necessarily the better choice in every category. Performance varies across market segments and investment horizons. Understanding a fund's approach, choosing a strategy that suits one's ability to stay invested and avoiding the temptation to chase recent winners remain essential when deciding between active and passive funds.
The study, based on data as of June 30, 2026, found that around 50% to 60% of assets in active equity funds outperformed their passive counterparts over recent periods. The proportion fell to about 40% over 10 years. However, the 10-year analysis covered only large-cap and banking and financial services funds because there were not enough passive funds with sufficiently long track records in other categories.
In an interview with CNBC-TV18, Kaustubh Belapurkar, Director and Manager of Research at Morningstar India, explained why active fund performance differs across categories, what is driving the results and how investors should approach the choice between active and passive strategies.
Why Morningstar compares active funds with passive alternatives
Morningstar's study differs from a straightforward comparison between actively managed funds and market indices. It compares active funds with passive funds that investors can actually buy, such as index funds and exchange-traded funds (ETFs).
An index is a benchmark, not an investment product. Investors can gain exposure to it through a fund, but their actual returns are affected by expenses and tracking errors. Comparing active funds with investable passive alternatives therefore gives investors a more practical basis for assessing performance.
"The benchmark is what it is, but it is investable only if there's a passive option, such as an index fund or an ETF, that the investor can buy," Belapurkar said.
The study also uses an asset-weighted measure rather than simply counting how many funds outperform. This distinction matters because a category in which half the funds beat their passive counterparts may have a much higher or lower proportion of assets in outperforming funds, depending on the size of those schemes.
The analysis also accounts for differences between passive strategies within a category. In large caps, for instance, passive funds track indices such as the Nifty 50, Sensex, Nifty 100, BSE 100 and Nifty Next 50. These indices cover different groups of stocks, while the availability and track records of funds tracking them vary.
Active funds: India fares better than the US, but the long-term picture is less encouraging
Around 50% to 60% of assets in active equity funds outperformed passive counterparts over recent periods, according to Morningstar's analysis. Over 10 years, the figure fell to about 40%, although this comparison was restricted to large-cap and banking and financial services funds.
The results look more favourable when compared with the US, where active large-cap strategies typically have success rates of just 5% to 10%. Even in mid-cap and small-cap categories, the proportion of active managers beating passive funds in the US is generally between 15% and 30%.
Belapurkar said India's results indicate that active management continues to find opportunities, but the scope for generating outperformance is narrowing.
"The number of funds, or the potential for alpha, is coming down," he said.
The category-wise results show why investors need to look beyond an overall success rate. Large-cap funds have benefited from recent differences in index performance, mid-cap funds have found it harder to outperform over longer periods, and small-cap funds have produced a stronger five-year record.
Large-cap funds: Why recent outperformance may not last
Active large-cap funds have recorded strong success rates over shorter periods. Around 85% or more outperformed passive counterparts over one and three years. The proportion fell to about half over five years and roughly a quarter over 10 years.
Belapurkar attributed the recent performance partly to the divergence between the Nifty 50 and Nifty Next 50. Over the one- and three-year periods discussed, the difference in returns between the two indices was around 800 to 900 basis points.
Most passive large-cap assets are concentrated in funds tracking the Nifty 50 or Sensex. Active managers, however, can take positions across a broader set of stocks, including companies beyond the biggest index constituents. They can also underweight heavyweight stocks when they believe other opportunities offer better returns.
Some large-cap funds have additional flexibility to invest up to 20% of their portfolios in smaller mid-cap stocks. While not every fund uses this option, it can give active managers another way to differentiate their portfolios from passive benchmarks.
The advantage has been less pronounced over longer periods. Belapurkar said the difference in returns between the Nifty 50 and Nifty Next 50 was more limited over the 10-year period, leaving active managers with less scope to benefit from the divergence that helped them in more recent years.
The contrast between the short- and long-term figures underlines why a strong recent performance record alone may not be enough to establish whether an active large-cap fund can consistently outperform passive alternatives.
Mid-cap funds: More money, fewer undiscovered opportunities
Mid-cap funds have delivered weaker results over longer periods. Morningstar's study found that 60% of active mid-cap funds outperformed passive counterparts over one year. The success rate fell to 41% over three years and 33% over five years.
The findings challenge the assumption that mid caps necessarily offer active managers greater opportunities to generate alpha through stock selection.
Belapurkar said the segment is no longer as undiscovered as investors might expect. Significant amounts of money have flowed into mid-cap stocks, while flexi-cap and large-and-mid-cap funds also invest in the same segment. This means more capital is competing for opportunities within a relatively limited universe.
Mid-cap stocks are defined as those ranked from 101st to 250th by market capitalisation, leaving 150 companies in the category at any given point. But the composition of the group changes as companies move in and out of the segment.
Belapurkar cited data on the Nifty Midcap 150 index showing that around 240 to 250 stocks had been part of it at some point over the preceding three years. Fund managers must navigate these changes while maintaining at least 65% of their portfolios in mid-cap stocks.
The combination of a limited universe, significant investor interest and changing stock composition makes it harder to identify companies that will consistently outperform. Morningstar could not provide a 10-year comparison for the category because passive mid-cap funds did not have sufficiently long track records.
Small-cap funds: Active management holds up over five years
Small-cap funds show a different pattern. Morningstar found that 93% of active small-cap funds outperformed passive counterparts over one year. The success rate dropped to 29% over three years before rising to 75% over five years.
Belapurkar attributed the weak three-year figure partly to the performance of a couple of large small-cap funds. Since assets in the category are concentrated in a handful of large strategies, their performance can have a significant effect on the overall results.
He said the five-year figure offered a more encouraging indication of the opportunities available to active managers. Small caps have a wider range of companies with differing business prospects and greater dispersion in returns within the index. This gives fund managers scope to select companies based on management quality and growth potential.
"The small-cap segment is larger, and small caps are more undiscovered. There's also greater dispersion in returns within the index," Belapurkar said.
The five-year result suggests that active stock selection can still make a difference in this category. However, the sharp variation across the one-, three- and five-year periods also shows how much reported success rates can depend on the investment horizon and the performance of larger funds.
Flexi-cap funds: A mixed picture
Flexi-cap funds, which can invest across market capitalisations, also produced mixed results. Around 60% of active flexi-cap funds outperformed passive counterparts over one year, while the proportion stood at 56% over three years.
That means a substantial proportion of active funds failed to beat their passive alternatives even in a category where managers have considerable flexibility over where to invest.
The figures offer no guarantee that a fund's flexibility will translate into outperformance. The investment approach, the market environment and the period being assessed all matter.
What should investors do?
Belapurkar cautioned investors against assuming that an actively managed fund will outperform simply because they remain invested in it for a long time. A fund can go through periods of underperformance because its investment style is out of favour or because the sectors in which it invests take longer to recover.
Investors need to understand a fund manager's approach and assess whether they can remain invested through such periods. Selling a fund because of short-term underperformance and moving into whichever fund has recently performed best can undermine long-term investment goals.
"If you think you cannot discipline yourself to stay invested through such periods, either work with an adviser or simply buy a passive fund," Belapurkar said.
Passive funds offer investors market exposure without relying on a manager's stock-selection decisions. Active funds may suit investors who are willing to evaluate managers, understand their investment processes and tolerate periods when their strategies lag the market.
Belapurkar highlighted three active funds worth watching: DSP Large Cap Fund, HDFC Mid-Cap Fund and UTI Flexi Cap Fund.
He pointed to changes in the management and investment process at DSP Large Cap Fund, the stock-selection record of HDFC Mid-Cap Fund manager Chirag Setalvad, and the quality-growth approach followed by UTI Flexi Cap Fund manager Ajay Tyagi.
The UTI fund has faced headwinds because value investing and public sector undertakings have come into favour, while those areas do not necessarily form part of its investment approach. Belapurkar said the contrarian call could take time to work out, rather than delivering results within six months or a year.
The study's central message is that investors should not assume that active funds will automatically justify their higher fees, nor that passive strategies are necessarily the better choice in every category. Performance varies across market segments and investment horizons. Understanding a fund's approach, choosing a strategy that suits one's ability to stay invested and avoiding the temptation to chase recent winners remain essential when deciding between active and passive funds.
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