Data ending July 2026 shows 71% of Indian large-cap and 76% of mid-cap active funds underperformed their benchmarks over five years. While small-cap funds showed better relative results, high expense ratios compared to passive index funds continue to impact net investor returns.
A recent performance analysis based on data from the Association of Mutual Funds in India (AMFI) highlights the ongoing challenge active equity managers face in consistently delivering returns higher than their benchmark indices. As of July 2026, the majority of large-cap and mid-cap schemes have trailed their respective benchmarks over a five-year period.
Segment Performance Disparity
The data indicates that large-cap funds struggled the most, with 71% failing to beat their benchmarks over the five years ending in July 2026. Mid-cap funds faced even higher pressure, with an underperformance rate of 76%. In contrast, the small-cap segment proved more resilient, where 43% of funds trailed their benchmarks, suggesting that active stock selection remains more effective in segments with smaller market capitalizations where research-driven alpha is often easier to uncover.
The Impact of Expense Ratios
One of the primary factors contributing to this trend is the difference in cost structures between active and passive investment products. Active large-cap funds currently carry average expense ratios of 1.73% for regular plans and 0.73% for direct plans. Conversely, investors opting for index funds tracking the Nifty 50 or Nifty 100 incur significantly lower charges, with averages of 0.46% and 0.18%, respectively. Nifty 50 Exchange Traded Funds (ETFs) remain the most cost-effective option, averaging 0.06%. These costs are deducted from the fund's assets, meaning that active managers must generate substantial extra returns just to match the performance of a low-cost index fund after fees.
Global Relative Standing
Despite these local challenges, Indian active funds generally show a better track record when measured against international peers. The underperformance rates for Indian active funds across one, three, five, and ten-year horizons are lower than the global median. Specifically, India's ten-year underperformance rate is among the lowest globally, indicating that active management in India may still provide more competitive outcomes than in highly developed markets like the US or UK, where index-based investing has become the dominant strategy.
Investor Considerations
The data suggests that for investors prioritizing large-cap exposure, the low-cost structure of passive index funds often provides a more predictable outcome. However, active management may continue to play a role in mid-cap and small-cap strategies, where the ability to select specific stocks that outperform the broader index remains a key differentiator. Investors should continue to monitor the expense ratios and long-term performance consistency of their portfolios, as costs act as a persistent drag on net returns in large-cap categories.