Index Funds vs Actively Managed Mutual Funds - Which Performs Better Over Time

A fund manager in Mumbai charges you 1.5% annually to pick stocks. An index fund charges 0.2% to simply mirror the Nifty 50. That 1.3% difference seems small. Over 20 years on Rs 50 lakh, it adds up to Rs 35-40 lakh in lost returns.

This is the core of the index vs active debate. And the data is brutal for active managers.

According to the SPIVA India Year-End 2024 report, 81.5% of actively managed large-cap funds failed to beat their benchmark. (S\&P Global) That's not a typo. More than 8 out of 10 fund managers, despite their research teams, market access, and expertise, couldn't beat a simple index.

At Belong, we've spent years helping NRIs navigate Indian investments. The index vs active question comes up constantly in our WhatsApp community. The answer isn't as simple as "index funds always win." 

It depends on which market segment you're investing in, your investment horizon, and how much you're willing to pay for the chance of outperformance.

This guide breaks down everything: the real performance data, expense ratio math, where active management still makes sense, and how to build a portfolio that uses both intelligently.

What Exactly Are Index Funds?

Index funds are mutual funds that track a specific market index. They don't try to beat the market. They aim to match it.

Take a Nifty 50 Index Fund. It holds the same 50 stocks as the Nifty 50 index, in the same proportions. If Reliance has 10% weight in the index, the fund holds 10% in Reliance. If Nifty 50 rises 12%, the fund rises approximately 12% (minus a tiny expense ratio).

The fund manager's job is simple: replicate the index as closely as possible. No stock picking. No market timing. No research teams analyzing company fundamentals. Just mirror the benchmark.

Common Index Fund Types in India:

The appeal is straightforward: you get market returns at rock-bottom costs.

👉 Tip: For core portfolio exposure to large-cap Indian equities, index funds are hard to beat. The data consistently shows most active managers can't outperform the benchmark over long periods.

What Are Actively Managed Funds?

Actively managed funds employ fund managers and research teams to pick stocks they believe will outperform the market. The goal isn't to match the index. It's to beat it.

A fund manager at an active large-cap fund might decide that HDFC Bank looks undervalued while ICICI Bank looks overpriced. They'll overweight HDFC Bank and underweight ICICI Bank relative to the index. If they're right, the fund beats the benchmark. If wrong, it underperforms.

This research-driven approach costs money. Fund houses employ analysts, portfolio managers, risk teams, and compliance officers. These costs get passed to investors through higher expense ratios.

The Promise: Skilled managers can identify mispriced stocks, avoid overvalued ones, and protect your portfolio during downturns.

The Reality: Most managers fail to deliver on this promise over extended periods.

The SPIVA Scorecard: What the Data Actually Shows

S\&P Dow Jones publishes the SPIVA (S\&P Indices Versus Active) scorecard, tracking how many active funds beat their benchmarks. It's the most comprehensive study of active vs passive performance globally.

Here's what the India data reveals:

SPIVA India Large-Cap Performance:

(S\&P Global SPIVA India 2024)

Read that again. Over a decade, roughly 85% of actively managed large-cap funds in India failed to beat the Nifty or Sensex.

Mid-Year 2025 Update:

The first half of 2025 showed similar patterns. According to the SPIVA India Mid-Year 2025 report, 66% of large-cap funds underperformed their benchmark. (S\&P Global)

Global Picture:

This isn't unique to India. According to Apollo Academy analysis, roughly 90% of active equity fund managers globally underperform their index over 10-15 year periods. (Apollo Academy)

The data is consistent across geographies and time periods. Most active managers underperform, and underperformance rates increase as the time horizon lengthens.

The Expense Ratio Gap: Why Costs Matter So Much

Here's where the math gets interesting.

Typical Expense Ratios:

(Groww, Fincash)

That 1-1.5% annual difference compounds dramatically over time.

Example: Rs 50 Lakh Invested Over 20 Years

Assuming 12% gross market return:

• Index Fund (0.2% expense ratio): Final value = Rs 4.58 crore
• Active Fund (1.5% expense ratio): Final value = Rs 3.85 crore
• Difference: Rs 73 lakh

That's Rs 73 lakh gone to fees over 20 years. And this assumes the active fund matches the market before fees. If it underperforms (as most do), the gap widens further.

👉 Tip: Every 0.5% in expense ratio costs you roughly 10% of your final corpus over 20 years. Check expense ratios before investing, and always choose Direct plans over Regular plans for lower costs.

Where Active Management Actually Wins

Here's where the story gets nuanced. Active management doesn't fail everywhere.

Mid and Small-Cap Segments:

The SPIVA India Mid-Year 2025 data shows a different picture for mid and small-cap funds. Only 34.5% of Indian Equity Mid-/Small-Cap funds underperformed over the six-month period. Over one year, just 38.6% underperformed. (S\&P Global)

Why the difference?

Market Efficiency: Large-cap stocks like Reliance and TCS are heavily researched. Hundreds of analysts cover them. Information is quickly priced in. Finding mispriced stocks is hard.

Mid and small-caps have less analyst coverage. Information asymmetry exists. Skilled managers can find opportunities the market has missed.

ELSS Funds:

In 2024, actively managed ELSS (tax-saving) funds had only a 45% underperformance rate. This was the only category where the majority of funds outperformed. A tilt toward small-cap exposure likely contributed. (S\&P Global)

During Market Corrections:

Active managers can theoretically reduce equity exposure during downturns. Index funds must stay fully invested regardless of market conditions. During the 2020 COVID crash, some active funds limited losses better than passive alternatives.

The caveat: Most active managers fail to time markets consistently. The data shows that even during corrections, many active funds fall more than their benchmarks.

The Long-Term Verdict: Time Works Against Active Managers

Here's the pattern that repeats across every SPIVA study globally:

Underperformance rates increase with time.

In the short term (1 year), some active managers look good. They might have made a lucky call or their style is temporarily in favor. Over 3, 5, and 10 years, luck evens out. Skill becomes the only differentiator. And genuine skill is rare.

According to S\&P Dow Jones Indices: "Over the 15-year period ending December 2024, there were no categories in which a majority of active managers outperformed." (Evidence Investor)

Not one category. Not in any market. Zero.

The persistence data is equally damning. Funds that outperform in one period rarely maintain that outperformance. The S\&P Persistence Scorecard shows that top-quartile funds in one year frequently become average or below-average performers in subsequent years.

👉 Tip: Don't chase last year's top-performing fund. Historical outperformance doesn't predict future outperformance. The fund that returned 40% last year is statistically unlikely to repeat that performance.

Tracking Error: The Hidden Factor in Index Funds

Index funds aim to match their benchmark, but they rarely match it perfectly. The difference is called tracking error.

What Causes Tracking Error?

• Expense ratio: Even 0.2% annually creates a drag
• Cash holdings: Funds hold some cash for redemptions
• Rebalancing delays: Time lag when index constituents change
• Dividend timing: Differences in dividend reinvestment

Good vs Poor Tracking:

When comparing index funds, don't just look at expense ratios. Check tracking error too. A fund with 0.3% expense ratio but 1.2% tracking error may perform worse than one with 0.5% expense ratio and 0.2% tracking error.

Best-in-Class Index Funds (as of December 2025):

(INDmoney, Groww)

Taxation: Both Categories Are Equal

Good news: Index funds and actively managed equity funds receive identical tax treatment. Your choice doesn't affect your tax bill.

Equity Fund Taxation (FY 2025-26):

(Income Tax Department)

NRI-Specific Considerations:

For NRIs, TDS is deducted at source on redemptions:

• STCG: 20% TDS
• LTCG: 12.5% TDS on gains above exemption

You can claim refunds if TDS exceeds actual liability by filing an ITR in India.

The GIFT City Exception:

GIFT City mutual funds offer zero capital gains tax for NRIs, regardless of whether they're index or active funds. For large portfolios, this tax advantage can be substantial. Explore options like Tata India Dynamic Equity Fund or DSP Global Equity Fund through Belong's GIFT City platform.

The Core-Satellite Strategy: Using Both Intelligently

The smartest approach isn't choosing one or the other. It's using both strategically.

The Core-Satellite Model:

Core (60-70% of equity allocation): Index funds for large-cap exposure. Low cost, market returns, no manager risk.

Satellite (30-40% of equity allocation): Active funds for mid-cap, small-cap, or thematic exposure where skilled managers can add value.

Example Portfolio:

• Rs 30 lakh in UTI Nifty 50 Index Fund (core)
• Rs 10 lakh in an active mid-cap fund with strong track record (satellite)
• Rs 10 lakh in an active small-cap fund (satellite)

This structure captures market returns at low cost for your largest allocation, while giving skilled managers a chance to add value in less efficient market segments.

👉 Tip: For your core large-cap allocation, the data strongly favors index funds. Reserve active management for mid and small-caps where the odds of outperformance are better.

How to Choose Between Index and Active for Your Goals

Choose Index Funds When:

• You want large-cap Indian equity exposure
• You prefer low costs and simplicity
• You don't want to research fund managers
• You have a 7+ year investment horizon
• You believe in "owning the market" rather than trying to beat it

Choose Active Funds When:

• You're investing in mid-cap or small-cap segments
• You've identified a fund manager with a proven, repeatable process
• You're willing to pay higher fees for the chance of outperformance
• You want a fund that can manage downside during corrections
• You're investing in thematic or sectoral opportunities

Questions to Ask Before Choosing Active:

1. Has the fund outperformed its benchmark over 5 and 10 years?
2. Has the same fund manager been running it throughout?
3. Is the outperformance consistent or concentrated in one period?
4. What's the expense ratio, and is it justified by performance?
5. How did the fund perform during market corrections?

If you can't answer these questions confidently, default to index funds.

Common Mistakes NRI Investors Make

Chasing Past Performance:

The fund that topped the charts last year gets massive inflows. But past performance doesn't predict future results. SPIVA persistence data shows top performers frequently become laggards.

Ignoring Expense Ratios:

A 1.5% expense ratio doesn't sound like much. Over 20 years, it can cost you 30-40% of your potential returns. Always check costs.

Assuming Active Means Better:

Higher fees don't guarantee better returns. In large-caps, the opposite is usually true. You're paying more to get less.

Not Understanding What You Own:

Many investors buy "large-cap funds" without realizing they're paying 1.5% for exposure they could get at 0.2% through an index fund. Know what you're paying for.

Switching Too Frequently:

Moving from underperforming active funds to last year's top performers is a recipe for poor returns. You buy high and sell low. Stay invested.

Index Funds Available for NRIs

NRIs can invest in Indian index funds through regular mutual fund channels. The process is the same as investing in any mutual fund.

Requirements:

• PAN card
• KYC completion
• NRE or NRO account for fund purchases
• FATCA declaration

Platform Options:

• Direct through AMC websites (lowest cost)
• Belong app for GIFT City funds with zero capital gains tax
• Regular mutual fund platforms

Use our Residential Status Calculator to confirm your NRI status, and the Compliance Compass to ensure you're meeting all regulatory requirements.

The Survivorship Bias Problem

Here's something most comparisons miss: funds that fail disappear from the data.

According to SPIVA methodology, over 10-year periods, roughly 30% of funds either merge or liquidate. (S\&P Global) These are typically poor performers. When they disappear, the surviving funds look better than they actually were.

If you had randomly picked an active fund 10 years ago, there's a 30% chance it no longer exists. And the ones that do exist represent the "survivors," not the full picture.

Index funds don't have this problem. The Nifty 50 exists today just as it did 10 years ago. What you see is what you get.

👉 Tip: When evaluating active fund performance, remember you're only seeing survivors. The full picture, including funds that failed, would show even worse active management performance.

What Global Research Says

The index vs active debate has been studied extensively in developed markets where data goes back decades.

US Market (20-Year Data):

According to the 2024 SPIVA US Scorecard, 94% of US large-cap funds underperformed the S\&P 500 over 20 years. (Index Fund Advisors)

Why This Matters for India:

As India's markets mature and become more efficient, the odds for active managers will likely worsen. Large-cap Indian stocks are already well-researched. Finding mispriced stocks will only get harder.

The lesson from developed markets: the case for index funds strengthens over time.

The Bottom Line

The data is clear: For large-cap Indian equity exposure, index funds win. Not sometimes. Not usually. Consistently, across time periods and market cycles.

Over 80% of active large-cap managers fail to beat a simple index. The ones who succeed rarely maintain their outperformance. And all of them charge fees that compound against you over decades.

This doesn't mean active management is useless. In mid and small-caps, where markets are less efficient, skilled managers can add value. But even there, choosing the right manager requires homework, and past performance is no guarantee.

The smart approach for most NRI investors:

1. Index funds for core large-cap exposure (60-70% of equity)
2. Active funds for mid/small-cap satellites (30-40% of equity)
3. Check expense ratios and choose Direct plans
4. Stay invested long-term and ignore short-term performance

For portfolios where tax efficiency matters, GIFT City funds offer zero capital gains tax regardless of whether they're index or active.

Want to discuss which approach suits your portfolio? Join our WhatsApp community where NRIs discuss these decisions daily. Download the Belong app to explore tax-efficient investment options and compare funds side by side.

The best investment decision you can make is understanding what you're paying for. In large-caps, you're usually paying more to get less. The index wins.

Sources:

• S\&P Global SPIVA India Year-End 2024
• S\&P Global SPIVA India Mid-Year 2025
• Apollo Academy SPIVA Analysis
• Evidence Investor SPIVA Overview
• Groww Index Fund Data
• INDmoney Fund Analysis
• Fincash Index Fund Report
• Tickertape Fund Research
• Income Tax Department