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Most Funds Fail to Outperform
Data from the Association of Mutual Funds in India (AMFI) shows that over the past decade ending March 2026, most actively managed large-cap mutual fund schemes did not generate significant outperformance. On average, these funds returned 11.59%, falling short of their benchmarks like the BSE 100 TRI and NSE 100 TRI, which delivered approximately 12.80% during the same period. This trend is consistent; S&P Dow Jones Indices data shows a high percentage, often over 80%, of large-cap funds underperforming their benchmarks over various long-term periods. Experts say this difficulty stems from how efficiently markets work, including a narrow investment universe and widespread information, which make it harder to find large-cap stocks trading below their true value.
High Costs Eat Away at Returns
The main reason for this underperformance is the expense ratio. Regular plans, which include distributor commissions, have much higher fees—averaging around 1.96% compared to 0.88% for direct plans. This difference, though small, adds up significantly over time. Over 20 years, a 1% higher expense ratio can reduce potential savings by as much as ₹15-26 lakh. Data clearly shows that when investments were made directly, the number of outperforming schemes jumped from 3 to 11 out of 23 schemes with over a decade of history, showing the direct impact of costs on net returns. This cost disadvantage is a key driver behind the widespread underperformance attributed to active funds.
Investors Choose Cheaper Passive Funds
The consistent failure of active large-cap funds to beat indices, along with their higher fees, has boosted the growth of passive investment options. Index funds, which aim to match benchmark performance at a much lower cost (often 0.05% to 0.5%), are increasingly popular. By March 2026, passive funds managed over ₹12 lakh crore in India, marking a significant shift. The efficiency of benchmarks like the Nifty 50 TRI, which automatically rebalances and reflects market cap changes, makes them a tough competitor that active managers struggle to consistently beat after costs.
Economic Factors Impact Returns
Broader economic conditions also affect large-cap fund performance. While stable large-cap companies generally offer stability across market cycles, high inflation can reduce purchasing power and increase borrowing costs for businesses, potentially impacting earnings and stock prices. Similarly, interest rate hikes increase the cost of capital, a factor that directly affects company profitability and thus fund performance. While India's economic fundamentals have remained relatively strong, global uncertainties, currency depreciation, and inflationary pressures can introduce volatility, affecting the overall equity market and the ability of fund managers to generate higher returns.
Why Active Funds Struggle to Compete
The core challenge for active large-cap funds remains overcoming efficient market structures. With information widely available and large-cap stocks heavily researched, fund managers find fewer opportunities to pick undervalued stocks. Many large-cap funds now closely resemble their benchmarks but charge active management fees, creating a significant cost disadvantage that's hard to overcome. For instance, as of early 2026, the Nifty 50 traded at a P/E of about 22, and the BSE Sensex around 23, suggesting potentially high valuations where finding significant extra returns is even harder.
The low cost and high efficiency of index funds present a major threat to active large-cap management. While active funds aim to outperform, data shows over 80% fail after accounting for fees. Investors therefore pay more for a service that typically underdelivers compared to a passive index tracker. The debate has moved from 'can active funds outperform' to 'can they outperform enough to justify their fees'.
Fund managers also face limitations, such as SEBI's requirement for large-cap funds to invest in the top 100 stocks, restricting their investment universe. Additionally, holding cash for liquidity, a necessity for active funds, causes a performance drag of 50-100 basis points annually compared to an index fund that holds no cash. These operational factors place active managers at a disadvantage against passive benchmarks.
What Lies Ahead for Large-Cap Funds
Looking ahead to 2026 and beyond, the structural challenges for active large-cap funds are likely to continue. While some experts suggest large-cap funds may offer stability in volatile markets, acting as anchors in a portfolio, their ability to generate significant extra returns remains uncertain. The trend towards passive investing is expected to continue, driven by investor focus on costs and the consistent performance of index funds. Investors seeking stable, long-term equity exposure may find more value in direct plans of large-cap funds or, more advantageously, in low-cost index funds and ETFs. For active management to deliver consistent net outperformance after all costs, a clear and proven ability would be essential, a benchmark few have met over the past decade.