2 days ago
Active Funds Retain Edge as Long-Term Advantage Narrows
Active funds are managed by people who choose which stocks to buy and sell.
Passive funds usually follow a market index.
The report says about half of active funds did better than passive funds over one, three and five years.
Active funds did especially well in some large-cap and small-cap comparisons.
However, passive mid-cap funds performed slightly better over one year and five years.
The difference between the two approaches became smaller over longer periods.
After 10 years, large-cap active and passive funds had nearly identical returns.
Experts disagree about whether this reflects better active management or the way the market is structured.
Morningstar found about half of active funds outperformed passive funds over one-, three- and five-year periods.
Active large-cap funds returned 10.7% over three years, compared with 8.5% for passive funds.
Small-cap active funds gained 3.6% over one year, while passive funds declined 0.2%; mid-cap passive funds outperformed active funds.
Over five years, active and passive returns moved closer, with large-cap funds returning 12.2% and 12.3%, respectively, over 10 years.
Fund executives said active strategies benefit from stock selection and off-benchmark flexibility, while passive strategies offer broader idea exposure and may suit investors seeking simplicity.
- Who
- Active and passive mutual funds, along with views from Morningstar, Mirae Asset Investment Managers and DSP Fund Managers.
- What
- A Morningstar comparison found that active funds generally retained an advantage over passive funds in several periods, although the gap narrowed over time.
- Where
- The article references Morningstar India and Indian mutual-fund categories; no specific location for the analysis is stated.
- When
- The analysis was published on October 2, 2026, and covers one-, three-, five- and 10-year performance periods.
- Why
- Active funds can select individual stocks and take off-benchmark positions, while passive funds follow indexes and offer different structural advantages.
Case for Active Funds
Case for Passive Funds
Source of returns
Case for Active Funds
Active managers can seek the strongest stocks, avoid weaker ones and create outperformance through stock and sector selection.
Case for Passive Funds
Passive funds can outperform in particular market environments, and their returns may benefit when index heavyweights drive the benchmark.
Investment flexibility
Case for Active Funds
Active managers can take off-benchmark positions, allowing them to pursue opportunities outside the index, especially during volatile markets.
Case for Passive Funds
Passive funds face fewer limits on launching new investment ideas, while active managers face regulatory categorisation constraints.
Investor choice
Case for Active Funds
Investors comfortable assessing fund managers and stock-selection approaches may prefer active funds.
Case for Passive Funds
Investors who do not want to evaluate managers may be better served by simpler passive products, especially as long-term returns converge.
Key facts
- One-year large-cap returns
- Active funds: 3.2%; passive funds: 5.6%.
- Three-year large-cap returns
- Active funds: 10.7%; passive funds: 8.5%.
- One-year small-cap returns
- Active funds: 3.6%; passive funds: -0.2%.
- One-year mid-cap returns
- Active funds: 3.3%; passive funds: 3.9%.
- Five-year mid-cap returns
- Active funds: 17.4%; passive funds: 17.9%, a 50-basis-point gap.
- Five-year small-cap returns
- Active funds: 17.5%; passive funds: 15.6%.
- Ten-year large-cap returns
- Active funds: 12.2%; passive funds: 12.3%.
Quotes
Kaustubh Belapurkar
Director, Manager of Research, Morningstar India
“Active funds can also take off-benchmark exposure. Well-managed funds can create outperformance through superior stock and sector selection. We see this being successfully executed, particularly in volatile market conditions or when benchmark returns are not driven by just a handful of index heavyweights.”
thehindubusinessline.com
“Active is in play because of the number of opportunities that are still alive, and a lot of these opportunities are outside the index, whether it’s large-cap, mid-cap or small-cap.”
thehindubusinessline.com
Sources
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