Active vs Passive Investing in India: A decisive guide
- Manan Mehta
- Nov 21
- 5 min read
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Active vs Passive Investing in India - Real Data
The SPIVA India Scorecard measures Indian actively managed funds' performance against benchmarks over various time horizons. The most recent reports cover year-end 2024 and mid-year 2025.
Indian Equity Large-Cap Funds: Passive Wins Decisively
What the SPIVA India data shows (Official Numbers):
Time Period | Underperformance Rate |
1 Year (2024) | 60% |
3 Year | 75% |
5 Year | 93% |
10 Year | 74% |
Mid-Year 2025 Update (H1 2025):
6-month underperformance: 65.6%
1-year underperformance: 41.9%
3-year underperformance: 66.7%
5-year underperformance: 89.7%
10-year underperformance: 73.3%
Translation: Over 10 years, 73-74% of actively managed Indian large-cap funds underperformed the S&P India LargeMidCap benchmark.
Only 26-27% of large-cap active funds beat the index over 10 years.
Why Large-Cap Active Funds Fail
The 5-year data is particularly damning: 93% underperformance. This means only 7% of large-cap active fund managers beat their benchmark over 5 years.
Reason: Large-cap stocks (top 100 companies) are heavily researched by thousands of analysts. Information is efficiently priced. Managers struggle to find edges.
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Indian ELSS (Equity-Linked Savings Schemes): Mixed Results
SPIVA India Data:
Time Period | Underperformance Rate |
1 Year (2024) | 45% |
3 Year | 41% |
5 Year | 65% |
10 Year | 87% |
Mid-Year 2025 Update:
H1 2025 underperformance: 76.9%
Translation: Over 10 years, 87% of ELSS funds underperformed the S&P India BMI benchmark.
Notable: ELSS funds showed the best 1-year performance (only 45% underperformed in 2024), but deteriorated sharply over longer periods.
Indian Equity Mid-/Small-Cap Funds: Better But Still Underperforming
SPIVA India Data (Year-End 2024):
Time Period | Underperformance Rate |
1 Year (2024) | 54% |
3 Year | 74% |
5 Year | 70% |
10 Year | 82% |
Mid-Year 2025 Update:
6-month underperformance: 34.5%
1-year underperformance: 38.6%
3-year underperformance: 80.0%
5-year underperformance: 67.3%
10-year underperformance: 81.7%
Translation: Even in mid-cap/small-cap—where active managers should have an advantage—82% underperformed over 10 years.
Important note: This is different from global data where small-cap shows more dispersion. Indian mid/small-cap still shows majority underperformance.
Debt Mutual Funds: Shocking Underperformance
Indian Composite Bond Funds (SPIVA Data - Year-End 2024):
Time Period | Underperformance Rate |
1 Year (2024) | 93% |
3 Year | 83% |
5 Year | 95% |
10 Year | 98.5% |
Translation: Over 10 years, 98.5% of Indian Composite Bond funds underperformed their benchmark. Only 2 out of 132 funds beat the index.
Indian Government Bond Funds:
Time Period | Underperformance Rate |
1 Year (2024) | 81.5% |
3 Year | 74% |
5 Year | 70% |
10 Year | 82% |
Mid-Year 2025 Update (H1 2025):
Underperformance: 72.0% (1-year, 3-year, 5-year and 10-year all showed 72%-95%+ underperformance)
Translation: Over 10 years, 82% of government bond active funds underperformed.
The Expense Ratio Impact (Why Active Fails)
Active fund average expense ratios (India):
Large-cap: 0.8-1.5%
Mid-cap: 0.9-1.6%
Small-cap: 1.0-1.8%
Passive fund expense ratios:
Index funds: 0.05-0.15%
Difference: 0.65-1.65% annually
The mathematical reality:
If all active fund managers collectively generate the market return (before fees), then on average they must underperform by the amount of their fees.
With fees 0.65-1.65% higher, passive beats active by that margin automatically.
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Performance Dispersion: Fund Selection Risk
The SPIVA report also highlights "fund selection risk"—the huge gap between top-performing and bottom-performing funds in the same category.
Example from SPIVA report (2024):
In the Indian Equity Mid-/Small-Cap category:
Top quartile funds: Outperformed by 3-6%
Bottom quartile funds: Underperformed by 4-6%
Gap between best and worst: 10-12%
Implication: Even if mid-cap active is slightly better on average, you face massive risk of picking the wrong fund. It's hard to identify top performers in advance.
Fund Survivorship: 30% of Funds Disappear
SPIVA finding (10-year period):
Weighted average: 30% of active funds merged or were liquidated over 10 years
Government bond funds: 55% disappearance rate
What this means:When funds perform terribly, they get closed. The data shows surviving funds. Actual underperformance is worse than reported—the worst performers are erased from history.
Performance Persistence: Past Winners Don't Repeat
The persistence problem (SPIVA finding):
An actively managed fund that beats its benchmark in one period rarely repeats in the next period.
Implication: You cannot reliably identify future outperformers by looking at past performance. Last year's winner is often next year's loser.
Risk-Adjusted Returns: Active Still Underperforms
Even adjusting for volatility (risk-adjusted returns), active underperforms:
10-Year Risk-Adjusted Performance:
Large-cap funds: 75% underperformance
Mid-cap funds: 48% underperformance
Debt funds: 89% underperformance
Translation: Even accounting for volatility differences, most active funds fail to justify their fees.
The Only Category Where Active Might Win: ELSS in Specific Periods
In 2024, ELSS funds showed 45% underperformance (55% outperformance)—the only category where majority of active funds beat benchmarks.
Why? According to SPIVA: ELSS funds tilt toward smaller-cap stocks. In 2024, small-caps outperformed large-caps, creating outperformance opportunity.
Caveat: This is temporary. Over 10 years, 87% of ELSS still underperform.
Actual Returns: What Investors Actually Got
From SPIVA Report - 10-Year Average Returns (Equal-Weighted):
Category | Benchmark Return | Average Active Fund Return | Underperformance |
Large-Cap | 13.75% | 12.03% | 1.72% |
ELSS | 14.56% | 12.49% | 2.07% |
Mid-/Small-Cap | 19.41% | 13.58% | 5.83% |
Translation:
Large-cap investors who used active funds got 1.72% less annually
ELSS investors got 2.07% less annually
Mid/small-cap investors got 5.83% less annually
Over 10 years at these rates:
₹10 lakh in large-cap index: ₹35.61 crore
₹10 lakh in large-cap active: ₹31.88 crore
Loss: ₹3.73 crore from underperformance
Verdict by Category
Category | Verdict | Recommendation |
Large-Cap | 73-74% underperformance | Use Nifty 50 index fund |
ELSS | 87% underperformance (10-yr) | Use index fund or carefully selected active |
Mid-/Small-Cap | 82% underperformance | Use index fund or top-quartile active |
Composite Bond | 98.5% underperformance | Use bond index or bank FDs |
Govt Bonds | 82% underperformance | Use bond index or bank FDs |
Your Evidence-Based Action Plan
Start here (Passive Portfolio):
60% Nifty 50 Index Fund (0.05-0.12% ER)
Guaranteed to beat 73-74% of large-cap active funds
Why: Large-cap is efficiently priced
20% Nifty Next 50 Index Fund (0.08-0.15% ER)
Beats majority of mid-cap active funds over 10 years
Why: Lower concentration than Nifty 50
15% Nifty Smallcap 50 Index Fund (0.10-0.20% ER)
Outperforms 82% of active small-cap funds
Why: Active managers can't consistently outperform small-cap either
5% Liquid Fund or Bank FD (5-6.5% return)
Emergency buffer and stability
Expected return: ~13-14% CAGR (beats 73-82% of active fund portfolio returns)
If You Must Use Active Funds
Only if:
Beats benchmark 6-8 of last 10 years (consistent outperformance, not luck)
Outperforms by 1%+ annually after fees (not just 0.2%; within luck margin)
Expense ratio below 1% for equity (higher makes beating benchmark nearly impossible)
Same manager 5+ years (verify manager built the track record, not inherited it)
Portfolio share max 20-30% (don't concentrate; fund selection risk is real)
Only allocate to active in mid-cap/small-cap where SPIVA shows more dispersion.
The Bottom Line: What SPIVA India Proves
Verified by official SPIVA data:
Large-cap: 73-74% of active funds underperform over 10 years → Use passive
ELSS: 87% underperform over 10 years → Use passive
Mid/small-cap: 82% underperform over 10 years → Use passive
Composite bonds: 98.5% underperform over 10 years → Use passive or FDs
Govt bonds: 82% underperform over 10 years → Use passive or FDs
Fund survivorship: 30% of funds disappeared over 10 years (actual underperformance worse than data shows).
Performance persistence: Weak (past winners don't repeat).
Fund selection risk: High—huge gap between top and bottom quartile.
If you want someone to assist you with your investments, feel free to contact us. Our team of experts will be happy to help. You can also email us at help@reymanwealth.com
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