The fall in actively-managed small and flexi cap schemes has been less than that of the innovative indices the asset management companies have come up with in the past one year and industry players believe that there is still a huge scope for generating alpha in India.
The number of index funds launched by asset management companies have surged 42% from last October to 345 as of October end. According to data from Value Research, the average return from various smallcap index funds including smart beta ones which have momentum, quality, and alpha stocks in the past one year is -13.2% compared to -10.66% in actively managed funds.
Better than expected performance in the Flexi-cap category
The performance has been even better in the flexi-cap category in which index funds on an average have delivered a return of – 5.7%, the one-year return from actively managed schemes have fallen only -1.36%.
The same trend is being seen in mid-cap and large-cap funds also. While the average one-year performance of large cap and mid cap categories separately have been similar for active and passive schemes, actively managed large & midcap schemes have fallen 3% compared to 4.6% fall in large & midcap index funds.
What did Nimesh Shah say?
No wonder, Nimesh Shah, CEO of ICICI Prudential AMC believes that active funds are the way to go, “Till active funds do well in India, if you ask me which fund to invest in, it will invariably be an active one.”
He added that more than 90% of ICICI Prudential’s assets under management have beaten the index in the last three years. “So passive investing will only happen when active does not work,” he said.
Interestingly, the international equity category has been the best performing with one year return of 27.7%. The two index schemes in this category ICICI Prudential Nasdaq 100 Index Fund and Motilal Oswal S&P 500 Index Fund in the past one year have been 25.6% and 19%.
While Shah is bullish on active funds, Viraj Gandhi, co-founder and CEO of SAMCO Mutual Fund noted that going ahead fund houses with a lower active ratio will have to choose between being an active or a passive only house as mathematically it’s very difficult to create out performance with just 20% or less active ratio to the benchmark. “There is a big room for active investing in India,” he said.
Gandhi added that things have improved for passive funds because of the innovation in the indices, but said that delivering alpha on top of it requires a right fund manager approach in terms of actively betting on stocks as well as their weightage in the portfolio.
Shah also believes that at some point in time, if they are unable to deliver alpha, the customer will decide if he wants to shift to passives.
The enthusiasm towards the passive category has slightly moderated in FY26 so far, after net inflows more than doubled in the last financial year, indicating that investors have started looking for higher than market returns by putting money in actively-managed funds.
According to data from Association of Mutual Funds in India (AMFI), passive schemes, including index funds, gold ETFs, and other ETFs garnered net inflow worth Rs 83,005.64 crore in FY26 so far, 17% lower than Rs 99,820.05 crore during April-October of the last financial year.