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Active equity vs passive equity investing in India

Tue, 12 May 2026 00:00:00 +0000

The active-versus-passive debate in Indian equity investing examines whether actively managed equity mutual funds , where a fund manager selects stocks based on research and conviction, consistently deliver higher risk-adjusted returns than passively managed funds that simply replicate a market index at lower cost.

This article presents the empirical evidence, cost analysis, and structural arguments advanced for each approach in the Indian market context as of 2024.

Definitions

Active equity fund: A fund where a fund manager and research team construct a portfolio of stocks based on fundamental analysis, valuation, sector views, and risk assessments. The fund’s benchmark (e.g., Nifty 50 TRI, Nifty 500 TRI) serves as the reference; the manager aims to generate alpha (return above the benchmark). Cost is higher due to research staff, portfolio management fees, and higher transaction turnover.

Alpha (Jensen's alpha) in mutual funds

Tue, 12 May 2026 00:00:00 +0000

Jensen’s alpha (commonly called simply “alpha” in mutual fund analysis) is a risk-adjusted performance measure that quantifies how much excess return a fund manager has delivered above the return that would be expected given the fund’s systematic risk exposure, as predicted by the Capital Asset Pricing Model (CAPM). A positive alpha indicates outperformance attributable to the manager; a negative alpha indicates underperformance after accounting for market risk.

The concept was introduced by Michael C. Jensen in his 1968 paper “The Performance of Mutual Funds in the Period 1945 to 1964” published in the Journal of Finance, making it one of the oldest formal measures of active management skill.

Information ratio in mutual funds

Tue, 12 May 2026 00:00:00 +0000

The information ratio (IR) is a risk-adjusted performance measure that quantifies a mutual fund manager’s ability to generate consistent excess returns (active returns) above a benchmark, per unit of active risk taken (tracking error). It combines the concepts of alpha and tracking error into a single efficiency measure, rewarding managers who generate high excess returns consistently rather than those who occasionally produce large excess returns with high variability.

The information ratio is particularly relevant in the Indian context as it distinguishes skilled active managers from those who appear to generate alpha simply by taking concentrated sector or stock bets.

Large-cap fund vs index fund in India

Tue, 12 May 2026 00:00:00 +0000

A large-cap mutual fund is an actively managed scheme that, under SEBI ’s categorisation circular of 6 October 2017, must invest at least 80 per cent of total assets in the equity of large-cap companies, defined as the top 100 companies by full market capitalisation listed on the National Stock Exchange and BSE per the AMFI semi-annual ranking. An index fund tracking the Nifty 50 , Nifty 100 or Sensex draws from the same universe but replicates the index by rules, holding its constituents in their weights with no stock selection. The active fund charges a higher fee for the chance of beating the index; the index fund charges a fraction of that and accepts the index return minus its cost.