The debate around active vs passive mutual funds has further intensified amid a rapidly expanding mutual fund investment landscape in the country. With more first-time investors entering the market through SIPs (systematic investment plans) and index investing emerging as a popular choice, the question — Should you let a fund manager pick stocks for you or simply follow the market index? — has never been more relevant.
In recent years, there has been a rapid shift toward passive investing, with passive funds contributing over Rs 12 lakh crore to the overall mutual fund industry assets of nearly Rs 80 lakh crore. One reason behind the growing popularity of passive funds is that they are attracted towards such funds for low cost and better transparency.
Capital market regulator SEBI’s push for greater disclosure and uniform benchmarking has also led to the creation of a level-playing field between active and passive funds. More retail investors are no longer blindly choosing categories — they’re comparing returns and consistency, and also evaluating whether active funds are genuinely beating their benchmarks. This has set the stage for a deeper, data-driven exploration of both active and passive mutual funds. Before we move further, let us understand what active and passive funds are.
Active Vs passive mutual funds – how they work
Active mutual funds are run by fund managers who actively select stocks, intending to beat the benchmark index. These managers use research, market insights, company meetings, and investment strategies to decide what to buy, sell, or hold at any point in time.
In the case of passive mutual funds, fund managers do not intend to outperform the market; instead, they aim to mirror it. These funds track a benchmark such as the Nifty 50, Nifty Next 50, or a broader index like the Nifty Midcap 150. Once the index composition is set, passive funds automatically replicate that basket with minimal changes.
Comparison Table: Top 5 Active vs Passive Funds (1-year and 10-year returns)
Top 5 active vs passive funds on 1-year return chart
| Active Funds (1-Year) | Category | Return | Passive Funds (1-Year) | Category | Return |
| HDFC Transportation & Logistics Fund (Direct) | Sectoral: Auto & Transportation | 24.32% | Motilal Oswal Nifty India Defence Index Fund (Direct) | Thematic | 32.95% |
| DSP Credit Risk Fund (Direct) | Debt | 22.55% | ABSL Nifty India Defence Index Fund (Direct) | Thematic | 32.18% |
| DSP Multi Asset Allocation Fund (Direct) | Hybrid: Multi-Asset | 20.80% | Tata Nifty Capital Markets Index Fund (Direct) | Thematic | 27.47% |
| DSP Banking & Financial Services Fund (Direct) | Equity: Sectoral–Banking | 20.08% | Kotak Nifty Financial Services Ex-Bank Index Fund (Direct) | Sectoral–Banking | 25.93% |
| HDFC Defence Fund (Direct) | Equity: Thematic | 19.88% | Motilal Oswal BSE Financials Ex-Bank 30 Index Fund (Direct) | Sectoral–Banking | 20.38% |
(Source: Value Research)
Top 5 active vs passive funds on 10-year return chart
| Active Funds (10-Year) | Category | Return | Passive Funds (10-Year) | Category | Return |
| Nippon India Small Cap Fund (Direct) | Equity: Small Cap | 21.74% | Nippon India ETF Nifty 50 Value 20 | Equity: Value | 15.74% |
| DSP Natural Resources & New Energy Fund (Direct) | Thematic: Energy | 20.62% | Nippon India ETF Nifty Dividend Opportunities 50 | Equity: Thematic | 15.40% |
| Axis Small Cap Fund (Direct) | Equity: Small Cap | 20.29% | SBI Nifty Next 50 ETF | Equity: Large Cap | 14.62% |
| Edelweiss Mid Cap Fund (Direct) | Equity: Mid Cap | 20.19% | ICICI Pru Nifty Next 50 Index Fund (Direct) | Equity: Large Cap | 14.23% |
| HDFC Small Cap Fund (Direct) | Equity: Small Cap | 19.88% | Nippon India ETF Nifty 50 BeES | Equity: Large Cap | 13.99% |
(Source: Value Research)
Some disclaimers for the methodology used to select the funds mentioned in the table:
-All major MF categories — equity, debt, hybrid, and commodity — are scanned to shortlist the top 5 active funds from the 15 largest fund houses. The only exception is that we excluded international funds.
-The top 5 passive funds are shortlisted from hundreds of index funds, exchange-traded funds (ETFs), and fund-of-funds (FoFs) offered by the 15 largest fund houses. We excluded gold and silver ETFs because they delivered exceptionally high returns in the past year, and including them would distort the comparison. We removed them to present a more realistic picture for readers.
Table summary:
Short Term (1-Year): Passive > Active
Passive thematic and sectoral index funds have delivered stronger returns.
They benefit from riding sector momentum without stock selection bias.
Ideal for tactical, theme-based, or short-horizon investors.
Long Term (10-Year): Active > Passive
Active funds—especially in small and mid caps—have delivered 5–7 percentage points higher CAGR than passive funds.
Over 10 years, this difference results in much larger wealth creation.
Ideal for long-term investors seeking compounding and alpha.
Investor strategy: What should retail investors do?
The active vs passive debate ultimately comes down to an investor’s risk appetite, time horizon, and comfort with market volatility. For investors who prefer stability and want a predictable return pattern, passive large-cap exposure — such as Nifty 50 or Sensex index funds — works well. These funds offer broad market exposure at very low cost and with minimal performance surprises.
For investors seeking higher long-term returns, a blended approach often works best. A core allocation to passive funds ensures stability and cost efficiency, while active mid-cap or small-cap funds provide the potential for higher alpha over long horizons. This combination balances consistency with growth potential.
First-time or young investors starting their wealth journey may be better off beginning with simple, low-cost passive funds. These funds are easy to understand and eliminate the challenge of selecting the “right” active fund. As confidence builds and investment knowledge grows, they can gradually add active funds to capture opportunities in less efficient parts of the market.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.