Active vs Passive in India: Why US Conclusions Don’t Automatically Apply

The active-versus-passive debate has become one of the most discussed subjects in investing over the last decade.

A large part of the case for passive investing comes from the experience of the United States, where many actively managed funds have struggled to outperform their benchmarks consistently after costs. Investors have also benefited from extremely low-cost index products, deep capital markets and highly efficient price discovery.

Those are important lessons.

But an important question is often overlooked:

Should an investment conclusion derived from one market automatically become the default conclusion in another?

How the debate reached India

Around 2020–21, the passive investing discussion became increasingly prominent in India.

The argument was simple and persuasive.

If most active fund managers in the US struggled to beat the index, why should Indian investors pay higher costs for active management? Why not simply invest in an index fund?

At the time, the passive mutual fund universe available to Indian investors was also considerably narrower than it is today. Much of the discussion therefore centred around the Nifty 50.

The argument gradually moved beyond saying that index funds were a useful investment option.

In some conversations, the conclusion became much broader:

Active management does not work. Just buy the Nifty 50.

That was the part worth questioning.

Revisiting the evidence

We recently revisited mutual fund performance using two screens from NGEN Markets:

• approximately 300 mutual fund schemes ranked by trailing 1-year returns; and
• approximately 300 mutual fund schemes ranked by trailing 3-year returns.

An interesting observation emerged.

In both screens, more than 90% of the actively managed funds appearing in the respective screen were ahead of a Nifty 50 index fund over the corresponding period.

That number is striking.

But it needs to be interpreted carefully.

What the 90% number does — and does not — tell us

This analysis does not establish that 90% of all actively managed mutual funds in India outperform passive funds.

The screens contain approximately 300 schemes ranked by trailing returns. They are not the complete universe of Indian equity mutual funds.

Nor is this an alpha study.

A small-cap fund should ordinarily be evaluated against an appropriate small-cap benchmark. A mid-cap fund has a different opportunity set from a large-cap fund. Flexicap, value, focused and other strategies also have different mandates and risk characteristics.

Therefore, comparing all these funds with the Nifty 50 does not tell us whether individual fund managers generated alpha against their appropriate benchmarks.

And importantly, none of this proves that active funds will continue to outperform in the future.

So why is the comparison useful?

Because the question being examined is different.

The original proposition matters

The purpose of looking at the Nifty 50 is not to claim that it is the appropriate benchmark for every active fund.

It is to revisit the investment proposition that was frequently heard several years ago:

If active management struggles in the US, Indian investors can largely avoid actively managed funds and simply invest in the Nifty 50.

Seen in that context, the subsequent experience becomes relevant.

It tells us that the answer was perhaps not as universal or as obvious as it was sometimes presented.

Markets are not identical

The US equity market developed under a particular set of circumstances.

Over long periods, a significant share of market value and corporate profitability became concentrated in a relatively small number of extraordinarily scalable companies. Several of these businesses were able to expand into entirely new profit pools while already operating at enormous scale.

Amazon, for example, evolved far beyond its origins in e-commerce. Other large technology businesses similarly built multiple large businesses on top of their existing platforms.

When the largest companies in a market continue to become disproportionately larger and more profitable, a market-capitalisation-weighted index becomes extremely difficult to outperform.

But this is not necessarily a permanent or universal feature of every equity market.

India has a different corporate structure, different levels of institutional participation, a different breadth of listed companies and a different stage of capital-market development.

Those differences matter.

This is not an argument against passive investing

Passive investing has an important place in portfolio construction.

Index funds offer transparency, simplicity and low costs. As Indian capital markets become deeper and more efficient, and as passive products continue to improve, active managers may find it increasingly difficult to generate meaningful excess returns.

That possibility should not be dismissed.

In fact, if evidence over sufficiently long periods shows that passive strategies consistently provide superior risk-adjusted investor outcomes, investors should be willing to change their conclusions.

The mistake would be to become ideological about either side.

“Active always wins” is no more intellectually sound than “passive always wins.”

Evidence before ideology

The larger lesson extends beyond the active-versus-passive debate.

Financial ideas travel quickly across borders. Research conducted in one country is discussed globally within hours. Investment philosophies developed in mature markets are often adopted elsewhere.

That is useful.

But ideas and conclusions are not the same thing.

A principle may be universal while the investment outcome depends heavily on market structure, valuations, regulation, index composition, investor behaviour and the stage of development of the market itself.

Investors should therefore ask not only:

“What worked?”

but also:

“Why did it work?”

And perhaps most importantly:

“Do the same conditions exist in the market in which I am investing?”

The objective is not to defend active investing or passive investing.

It is to preserve the habit of independent judgement.

Investment ideas can travel across markets. Conclusions need local evidence.

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About the data

The observations referred to above are based on two screens sourced from NGEN Markets comprising approximately 300 mutual fund schemes ranked respectively by trailing 1-year and trailing 3-year returns.

The underlying data and methodology can be reviewed here:

https://docs.google.com/spreadsheets/d/1EJfwBuieMNnLbRg4-GVZDWM1ImXH6dFaFCOdfkrzXjQ/edit?usp=sharing

Data accessed: 26 August 2026.

Disclaimer

This material is intended solely for educational and informational purposes and represents a general discussion of investment concepts. It should not be construed as investment advice, a recommendation, or an offer or solicitation to invest in any mutual fund scheme, security or investment strategy.

The comparison discussed above is not a category-wise benchmark comparison and should not be interpreted as evidence that any particular actively managed fund has generated alpha or will outperform any index or passive investment strategy in the future.

Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully.