Debating the Superiority: Active Management vs. Passive Investment in Mutual Funds
In the ever-evolving world of investments, a significant shift has been observed in India's mutual fund sector, with a growing preference for index funds over actively managed funds. This trend mirrors a broader global movement, as data suggests that actively managed funds often struggle to consistently outperform their benchmark index funds, especially after accounting for fees.
The mutual fund industry in India has witnessed remarkable growth, with assets under management surpassing ₹72.2 lakh crore as of mid-2025. This expansion is largely attributed to the increasing participation of retail investors, who favour long-term, market-linked investments that are often benchmarked against index performance.
Equity allocation within mutual funds stands at approximately ₹22.45 trillion, making it the largest asset class allocation by far. This heavy equity exposure underscores the importance of generating returns through stock market performance, making the active vs index debate highly relevant.
While the exact comparative performance figures for India are not explicitly detailed, the global and Indian context suggests several key insights:
1. Actively managed funds face challenges in consistently beating index funds due to higher expense ratios and the efficiency of Indian equity markets. 2. Index funds typically provide returns that closely track benchmark indices like the Nifty 50 or Sensex, with lower costs and greater transparency. 3. Many investors in India are increasingly choosing index funds and ETFs for their simplicity and cost-effectiveness, especially among new and retail investors entering through SIPs.
The vibrant Indian capital markets and growing domestic institutional participation provide a robust environment for active management, but also increase competition for active funds to deliver alpha. India's stock markets have become highly competitive, making it challenging even for skilled managers to sustainably outperform.
Suman, a 30-year-old investor, is one of the many individuals recently investigating index funds. An index fund, such as the DSP NIFTY 50 Index Fund, tracks a market index and aims to replicate the structure of the index it represents.
The first publicly available index fund was launched by the Vanguard Group in 1976. Since then, index funds have gained popularity due to their lower costs and the ability to provide broad diversification. In recent years, especially since 2018, index funds have performed a bit better than actively managed mutual funds.
The average expense ratio of a typical actively managed large-cap fund is 0.95%, while a typical large-cap index fund like NIFTY 50 or NIFTY 100 has an expense ratio of about 0.24%. This difference in costs can significantly impact an investor's returns over the long term.
However, it's essential to consider that the risk of one fund underperforming the index while the other overperforms requires careful management, as the overperforming fund would need to compensate for the losses made in the underperforming one.
In conclusion, while actively managed mutual funds in India continue to attract significant inflows, there is a marked shift towards index funds for many investors due to their cost efficiency and reliable tracking of market returns. Historically and globally, index funds have tended to outperform actively managed funds over the medium to long term after fees, and this trend is increasingly seen in India’s growing mutual fund ecosystem.
For precise, fund-specific performance data in India, consulting periodic reports by industry bodies like AMFI or mutual fund rating agencies would provide detailed comparative statistics.
Suman, intrigued by index funds' cost-effectiveness and reliable market tracking, is among the investors making a shift from actively managed funds towards index funds. Personal-finance management, particularly regarding investments, increasingly involves opting for low-cost index funds over expensive actively managed funds in India's finance sector.
A surge in the popularity of index funds among retail investors in India has led to a notable increase in assets under management in India's mutual fund industry, underscoring the significant role these funds play in personal-finance and broader financial management.
