Active vs passive investing: which wins in the long run?

The short answer

Neither side wins on a rule. In Indian equity funds over the last ten years, active funds have mostly been ahead, but the margin depends heavily on which part of the market you look at and how long you measure. The fee is the only part of the contest that is known in advance.

The figures below are for Direct plans, Growth option, computed from each fund's daily NAV up to 1 October 2026. Index funds are compared with active funds in the same slice of the market: Nifty 50 index funds against large-cap funds, Nifty Midcap 150 index funds against mid-cap funds, and Nifty Smallcap 250 index funds against small-cap funds.

Median returns, active vs index

Returns are annualised (CAGR). The index columns are the median of all index funds tracking that index, after their own costs. Mid-cap and small-cap index funds are young: only 3 Midcap 150 and 2 Smallcap 250 index funds in our data have a five-year record, and none has ten.

In each row the active median is ahead. That is not the story most global studies tell, and it is worth being honest about why the Indian numbers look this way rather than treating them as a law.

How many active funds beat the index fund

A median hides the spread. Here is how many individual active funds beat the median index fund over each period.

Two things stand out. In large caps, the share of winners falls as the period lengthens, from all of them over three years to about three in four over ten. The ten-year gap is also thin: 11.64% against 10.96%, about 0.7 points a year. And in mid caps, only 13 of 22 beat the index fund over five years, little better than a coin toss.

The spread inside a category is wider than the gap between active and passive. Over five years, large-cap funds returned anywhere from 5.00% to 11.94% a year; mid-cap funds from 9.88% to 19.62%. An index fund removes that spread. You get the market's return minus a small fee, without the chance of picking a fund at either end.

The part that is certain: cost

These are from AMFI's expense-ratio disclosures for 30 September 2026. An active large-cap fund starts each year about 0.8 percentage points behind a typical Nifty 50 index fund and has to earn that back from stock selection before it is ahead. On Regular plans the gap is wider, because distributor commission is added to both. Over 20 years, 0.8 points a year compounds into a meaningful amount: the impact of 1% calculator shows how much on your own numbers.

Index funds have a cost of their own beyond the fee, which is tracking difference. Our look at Nifty 50 index fund tracking error found five-year returns trailing the index by a fraction of a point, mostly explained by fees.

Why active has done well here, and why that may not last

A few reasons, none of which is guaranteed to continue:

• The window. The Nifty 50 index funds' median one-year return is −8.90%, against −4.71% for active large-cap funds. A weak year for the largest stocks pulls the index down, and active funds that held fewer of them, or more mid-sized companies, fell less. Measured from a different starting point, the picture can look different.
• Room outside the index. SEBI's rules require large-cap funds to hold at least 80% in the top 100 stocks, which leaves up to 20% for mid and small companies. When those did better than the largest stocks, large-cap funds that used the room benefited.
• Survivorship. Only funds that exist today are counted. Active funds that lagged and were merged away are missing from the table, which flatters the survivors. An investor in 2016 could not know which funds would survive.

The long-run tendency in more developed markets has been for fewer active funds to keep beating their index as markets mature and information spreads. Whether India follows that path, and how fast, is not something these numbers can answer.

How to use this

The choice does not have to be all or nothing. Many investors use an index fund as the core of their equity holding and add one or two active funds around it, an approach set out in core and satellite investing. Some practical points:

1. The case for passive is strongest in large caps, where the active edge is smallest over long periods and the fee gap is widest in proportion to it.
2. If you choose active, judge the fund over rolling periods, not one good year. Rolling returns show how often a fund beat its benchmark, not just whether it did from one date.
3. Use the Direct plan either way. The fee difference between Direct and Regular is larger than the difference between a cheap and an average index fund.
4. Don't switch after a bad year. Selling an active fund after it lags, or an index fund after the market falls, locks in the worst part of either strategy.

For a fuller explanation of how the two approaches work, read active vs passive investing, and see the companion post on why more Indian investors are choosing index funds.

This post is for education only and is not investment advice. Past returns do not predict future returns.