Active vs Passive Investing in India, What the SPIVA Data Shows

For many Indian investors, the active versus passive investing debate sounds simpler than it really is.

The argument for passive investing is straightforward. Buy an index fund, keep costs low and avoid the risk of selecting the wrong fund manager. The argument for active investing is equally familiar. A skilled fund manager can identify opportunities that an index cannot, potentially creating returns above the benchmark.

Both arguments have merit. The problem begins when either approach is treated as a complete investment strategy.

Buying an index fund still leaves the investor deciding how much equity exposure to take, which market segments to own and what to do when markets fall. Picking active funds independently creates a different problem: how do you identify genuine long-term fund management skill rather than simply selecting whatever performed best recently?

That is why the more useful way to look at active vs passive investing in India is through the lens of decision-making. The important distinction is not simply which product an investor buys. It is how the portfolio is researched, constructed, monitored and managed through different market cycles.

Key takeaway: An index can give an investor market exposure. An active fund can potentially add alpha. But neither automatically solves asset allocation, fund selection or investor behaviour. Those decisions still have to be managed.

What passive investing still leaves to the investor

Passive investing is designed to provide exposure to a market benchmark rather than depend on a fund manager's stock-picking decisions. If an investor buys a Nifty 50 index fund, for example, the objective is broadly to participate in the performance of the Nifty 50, rather than attempt to outperform it.

That simplicity is valuable. But simplicity should not be confused with the absence of decisions.

The Indian equity market's recent performance shows why.

As of August 31, 2026, the Nifty 50 had delivered -0.35% over one year and 8.32% annualised over five years. During the same periods, the Nifty Midcap 50 had delivered 18.36% and 20.72%, while the Nifty Microcap 250 had delivered 15.97% and 23.84% respectively. These figures are based on Total Return Index data.

Data as of August 31

The point is not that mid caps or small caps should replace large caps. These numbers simply demonstrate the amount of dispersion that can exist across market segments.

An investor who chooses passive funds still has to decide how much exposure belongs in each segment. They also have to decide how to rebalance when one part of the portfolio becomes much larger because of strong performance.

And then comes the most difficult decision of all: what happens when the market goes in the opposite direction?

An index fund will continue doing what it is designed to do. It will remain invested through the cycle. The investor still has to decide whether they will do the same.

That is where the passive approach leaves an important responsibility with the investor.

Why picking the best active fund does not solve the problem

The other common response is to move from passive investing to active funds and simply find the managers who have produced the highest returns.

This sounds logical until the data is examined over different time periods.

The SPIVA India Year-End 2025 scorecard shows that active fund performance varies significantly by category and investment horizon. In Indian large-cap funds, 75.0% underperformed their benchmark over one year. Over five years, the proportion rose to 84.4%, while 76.3% underperformed over ten years.

Mid- and small-cap funds tell a more nuanced story. Only 12.1% underperformed their benchmark over one year in 2025, meaning approximately 88% outperformed. But the proportion underperforming rose to 46.0% over five years and 79.0% over ten years.

SPIVA India Year-End 2025. Percentages represent active funds that underperformed their respective benchmarks.

This tells us two things at the same time.

• • First, active management should not be dismissed. The 2025 mid- and small-cap numbers demonstrate that active managers can have periods of significant outperformance.
• • Second, a strong recent period does not automatically establish that a particular fund will continue to outperform.

That makes the process of selecting an active fund considerably more demanding than looking at a one-year or three-year return table.

The question becomes one of identifying the quality and consistency of the investment process, understanding the risk taken to generate returns and determining whether the fund has a meaningful role within the overall portfolio.

That is a very different exercise from simply picking the highest number on a factsheet.

A high return is not the same as a high-quality return

This is where risk-adjusted analysis becomes useful.

A fund's return tells you what it made. It does not tell you how much volatility the investor experienced, how deeply the portfolio fell during difficult periods or how efficiently it converted risk into return.

For example, standard deviation measures how widely returns have varied over time. Maximum drawdown shows the largest decline from a previous peak. The Sharpe ratio looks at the return generated relative to the risk taken. None of these measures should be viewed in isolation, but together they provide a more complete picture than return alone.

The five-year data supplied for three active funds illustrates the point.

Five-year data as of September 2, 2026. Source: Morningstar

The HDFC Flexi Cap example is particularly useful. Its five-year return was 18% against 11% for the benchmark, while its standard deviation was 12.94% compared with 14.42% for the benchmark. Its maximum drawdown was -13.32%, compared with -18.59%.

The objective is not to find the fund that simply took the most risk. It is to understand whether the return generated has been appropriate relative to the risk taken.

The same principle becomes even more powerful when viewed over a long period because small annual differences can compound substantially.

According to the Morningstar data in the supplied September 2026 material, ₹1,00,000 invested in Nippon India Small Cap Fund at inception in 2013 grew to ₹19,06,291, compared with ₹7,70,842 for the Nifty Smallcap 250 TRI over the same period. The respective XIRRs were 24.05% and 16.11%.

This is what makes fund selection worth researching. A persistent difference in returns, when accompanied by an appropriate risk profile, can become meaningful over long periods.

But the reverse is also true. Selecting an active fund simply because it has recently produced exceptional returns can expose an investor to the risk of entering after the strongest part of its cycle has already passed.

The behaviour gap can be larger than the fund-selection gap

Even when an investor owns a good fund, the eventual investment experience can be very different from the fund's published return.

Investor behaviour is one of the reasons.

The Morningstar India examples supplied for this article show the problem clearly. In one example, a fund had delivered a three-year return of 40% as of April 2022, while the average investor earned only 20%. A large proportion of the money entered during the final year, after strong performance had already become visible.

A separate pharma-sector fund example showed a similar pattern, with the fund delivering 23% over three years while the average investor captured roughly six percentage points less.

The implication is important for portfolio construction. Investors often become more interested in an investment after it has performed well and less comfortable with it after a period of poor performance.

That can create a structural problem. Capital enters after a rally and exits after a correction, effectively turning market volatility into a permanent reduction in realised returns.

The SIP data provides another indication of how difficult maintaining investment discipline can be.

AMFI data for February 2026 showed a SIP stoppage ratio of 75.62%, compared with 74.83% in January. This ratio includes SIPs that were discontinued or completed relative to new SIP registrations, so it should not be interpreted as a direct measure of investors abandoning equities because of market fear. Some stoppages can also reflect completion of older SIP tenures. The broader point is that investor accounts can experience considerable churn even while aggregate SIP participation continues to grow.

India had crossed 10 crore active SIP accounts during 2025, while monthly SIP contributions were approaching ₹26,000 crore.

The market can therefore be growing structurally while individual investors continue to make inconsistent decisions within it.

What a professionally guided process actually does differently

This is where the role of professional guidance becomes more relevant.

At Vinca Wealth, the portfolio conversation should begin with the investor's objective and risk profile rather than with a search for last year's best-performing fund.

Fund selection then becomes one component of the process. Performance is considered alongside volatility, Sharpe ratio, drawdown and consistency across different market conditions. The objective is to understand not only whether a fund has outperformed, but what drove that outperformance and how it fits alongside the other holdings.

The same framework applies to asset allocation.

If mid caps have significantly outperformed large caps, the appropriate response is not automatically to increase mid-cap exposure. The portfolio needs to be examined in the context of the investor's existing allocation, investment horizon and ability to tolerate a subsequent period of underperformance.

This is where portfolio construction differs from fund shopping.

A collection of individually attractive funds does not automatically create a well-constructed portfolio. Two funds may hold similar companies, respond to the same market conditions or introduce more risk to the same part of the portfolio.

Research therefore needs to happen at two levels. The first is the fund itself. The second is what that fund does to the portfolio as a whole.

Rebalancing is part of the same discipline. Strong performance can gradually change the risk profile of a portfolio without the investor consciously deciding to take more risk. A structured review can identify those changes before they become a problem.

Most importantly, professional guidance can provide a framework for decisions during periods when emotions are strongest.

The purpose is not to predict every market turn. It is to prevent a portfolio from being repeatedly redesigned around the latest market narrative.

What investors should monitor in their own portfolio

The practical framework is relatively simple. Investors do not need to track every market statistic. They need to focus on the metrics that explain why their portfolio is behaving the way it is.

This framework also changes how an investor should interpret market headlines.

A strong one-year return in small caps may be relevant, but it does not automatically justify increasing small-cap exposure. A period of large-cap underperformance does not automatically make large caps unattractive. A fund that has underperformed for a year does not necessarily have a broken investment process.

The real decision is how the portfolio gets managed

The active versus passive debate will continue because both approaches have legitimate strengths.

Passive investing offers broad market exposure, transparency and a rules-based approach. Active investing gives fund managers the opportunity to make portfolio decisions that can potentially generate returns above the benchmark. The data shows that neither approach produces a simple answer across every category and every time horizon.

For the investor, the bigger decision is what happens around those products.

• • Who decides the asset allocation?
• • Who evaluates whether an active fund's outperformance is repeatable?
• • Who examines the risk taken to generate the return?
• • Who notices when the portfolio has become too concentrated?
• • And who provides the discipline to stay with an appropriate strategy when the latest market narrative is moving in the opposite direction?

Those decisions ultimately determine how the investor experiences the market.

At Vinca Wealth, the objective is to bring those decisions into a structured portfolio process, combining fund research, risk assessment, asset allocation and behavioural discipline rather than treating fund selection as an isolated exercise. Investors who want to understand whether their current portfolio is aligned with their goals, risk profile and investment horizon can book a free consultation with Vinca Wealth to review the strategy and identify where the portfolio may need greater structure.

Past performance is not indicative of future returns. Mutual fund investments are subject to market risks. Investors should evaluate investments based on their individual objectives, risk profile and investment horizon.

FAQs

1. Is active or passive investing better in India?

Neither is universally better. The choice depends on the investor’s objectives, risk profile, time horizon and portfolio strategy.

2. Why do some active funds outperform their benchmarks?

Skilled fund managers can add value through stock selection, portfolio construction and risk management, although outperformance is not consistent across all funds or time periods.

3. How should investors evaluate an active mutual fund?

Look beyond returns. Consider benchmark outperformance, consistency, volatility, Sharpe ratio and maximum drawdown.

4. Why do investors often earn less than their mutual funds?

Investors may enter after strong performance or exit during market corrections, creating a gap between the fund’s return and the return actually experienced by the investor.

5. What role can professional investment guidance play?

Professional guidance can help bring together fund selection, asset allocation, risk management, portfolio monitoring and behavioural discipline within a structured investment process.

Sources Links:

• • spglobal.com/spdji – SPIVA India - {Click Here}
• • spglobal.com/spdji – SPIVA India overview - {Click Here}
• • amfiindia.com – AMFI Monthly Note - {Click Here}
• • morningstar.in/posts/70371 - {Click Here}