Active funds do outperform the passive ones

By Morningstar |  19-10-18 | 

study from BofA-ML had found that out of 1,600 equity funds:

  • 3% outperformed the Nifty in first six months of 2018;
  • 6% outperformed the Nifty on a relative basis in the last one year;
  • 16% outperformed the benchmark in the last three years.

Ravichand of StockandLadder, decided to find out what this meant for the ordinary retail investor. By employing data from Morningstar Direct, he set out to answer:

Are there any equity funds which have been consistently outperforming the benchmark indices over for a very long horizon? Or, should we just heed the advice of investing legends like Buffett, Bogle and Lynch, who have consistently advised a low-cost index fund for the vast majority of investors?

I decided to look at data over 15 to 20 years to include two crucial financial events: the tech bubble of 2000 and the GFC of 2008. I reasoned that any fund which has outperformed over 15 to 20 years would have had to pass either one or both of these two very difficult tests. And those that have come out in flying colors surely have proved their mettle and stood the test of time.


Over a long period, the general wisdom is that equity as an asset class tends to do better. Hence the focus was restricted to pure equity funds and even within equity funds the scope was further narrowed down to the relatively less volatile large-cap funds.

Pure Mid-cap, Small-cap, thematic funds were kept out of the scope. The goal was to build a corpus and hence only growth funds were considered.

So, the final scope considered and the fund criteria came down to:

  1. Equity – Large Cap (G)
  2. Equity – Multi Cap (G)


To focus on funds with a reasonable size, the minimum AUM requirement was pegged at Rs 500 crores. 

Period of Reference

All data for ranking the performance of funds over 15 years and 20 years was taken as of August 31, 2018. 

Rules for the Road

  • The funds discussed here are NOT recommendations; either buy or sell. Please contact a Registered Investment Adviser before making any such decisions. My findings are posted here for educational and informational purposes only.
  • There is no reason to believe that the underlying data is not accurate. However, no guarantee is possible towards that end.
  • The search is an endeavor to find a suitable fund to invest based on my set of criteria,which may or may not be applicable for you nor be the best criteria to decide.  E.g. Pure thematic funds or pure sector specific funds were not considered since they were considered to be inherently more risky.
  • I am fully cognizant of the fact that past performance is NO guaranteethat the future returns may also follow the same pattern. But I strongly believe that funds who have done well for 15 or 20 years have a greater chance of doing well in the future too.
  • There are other factors too which are pertinent like the fund expense ratio, fund manager’s style, integrity of the AMC and its processes, which has not been explicitly considered in this exercise.

Equity funds: Large cap

The top 5 over a 15-year period as on August 31, 2018 and the relative out-performance against the Nifty 50. HDFC Top 100 and Aditya Birla Sun Life Frontline Equity are the big daddies out there- both in AUM and in performance. A 6% approximate out-performance is massive.

OCT19 - 1

The top 5 over a 20-year period as on August 31, 2018 and the relative out-performance against the Nifty 50. HDFC Top 100 and Tata Large Cap  absolutely rock over a 20-year period with an out-performance of around 8%. Beyond the top 3, the fund out-performance tapers off and in fact the 5th performing fund has not beaten the benchmark. Interesting.

Oct19 - 2

Equity funds: Multi cap

The top 5 multi-cap funds over a 15-year period as on August 31, 2018 and the relative out-performance against the Nifty 500.

Oct19 - 3

The top 5 multi-cap funds over a 20-year period as on August 31, 2018 and the relative out-performance against the Nifty 500. The top 3 have outperformed the broader index significantly.

Oct19 - 4

Do note, the same set of 5 funds make up the top 5 over both, the 15 years and 20 years period.

Equity funds: Index funds

Index funds over a 15-year period as on August 31, 2018.

Oct19 - 5

Top 3 large-cap equity funds

Based on 15 years and 20 years data, the top 3 (all growth schemes) in NO particular order:

  • HDFC Top 100
  • Aditya Birla Sun Life Frontline Equity
  • Tata Large Cap

A quick look at 10-year performance as on October 4, 2018, validates the above choices. HDFC Top 100 performed consistently well over a 5-year, 3-year and 2-year time period too. The top 3 funds (HDFC Top 100, Aditya Birla Sun Life Frontline, Tata Large Cap) continue their out-performance even for a 10-year time horizon to be in Top 10.

Oct19 - A

Top 3 multi-cap equity funds

Based on 15 years and 20 years data, the top 3 (all growth schemes) in NO particular order:

  • HDFC Equity
  • Aditya Birla Sun Life Equity
  • Franklin India Equity

A quick look at 10-year performance as on October 4, 2018, validates the above choices.

Oct19 - B

Top 2 index funds

Based on 15 years data, the top 2 (all growth schemes) in NO particular order:

  • ICICI Prudential Nifty Index
  • UTI Nifty Index

A quick look at 10-year performance as on October 4, 2018, validates the above choices.

Oct19 - C

Actively managed funds have significantly outperformed the benchmark indices.

The top fund in the multi-cap category, HDFC Equity (G), has outperformed the benchmark by 10.74% over a 20-year period.

Oct 19 - Take this 1

Actively managed funds have beaten the best index fund by a wide margin.

Actively managed funds have outperformed not just the benchmark indices but even the best performing index fund by a wide margin. The table compares the returns of large-cap funds as against the best performing index fund for 15 years - ICICI Pru Nifty Index (Reg Gr).

Oct 19 - Take this2

The SIP route

Let’s say you had taken the systematic investment route and started an SIP. If you had started a monthly SIP of Rs 10,000 for 15 years on September 1, 2003 in any of the top 5 large-cap funds, as against the returns you would have received if the SIP was done in the best performing index fund.

The result is as clear as night and day. The absolute returns in the top 2 large-cap equity funds is in excess of Rs 16 lakh (1.6 million) over the best performing index fund over a 15-year period.

It is also pertinent to note that the out-performance tapers off as we go down the list and for the 5th best fund, the excess returns is actually less than 1%.

This implies that you have to get the fund selection absolutely right.

Oct19 - SIP1

Multi-cap funds have performed better over pure large-cap funds

Multi-cap funds by design may invest in large, mid or small cap stocks and that seems to give them an edge over pure large-cap only funds. Over a 20-year period, the best performing multi-cap fund (HDFC Equity) has a 3.55% out-performance over the best performing large-cap only fund (25.10% versus 21.55%).

Oct19 - SIP2

Final Thoughts

* It is very clear to me now that at least in the Indian context, there are actively managed funds which have consistently beaten the benchmark indices and there is no need to jump into the indexing bandwagon.

* The best performing actively managed funds have not just outperformed the top index funds by a sizable margin and but also have done that over a very long time horizon of 15 to 20 years.

* As seen from the data, the excess returns generated seems to be tapering off as we go down the performance list. The key is to get the fund selection decision absolutely spot on. Hitching your financial bandwagon to the right fund is seen to be crucial as to where you will end up in your investing journey.

My suggestion to investors -  approach a trusted financial adviser to help you choose the best fund.  

This post initially appeared on

Add a Comment
Please login or register to post a comment.
Mayank Kumar
Dec 1 2018 01:48 AM
We can only choose benchmark indices and not the actual active funds themselves. This is because if we want the best funds in each category, the analysis will suffer from survival bias. If we choose for the worst funds in each category, the study will suffer from confirmation bias! If we select all funds in each group, then we would end up with sampling issues and time issues as there are only a handful of 20Y+ large cap funds and few reasonably old mid cap funds and only young small cap funds.

So the only meaningful way is to choose benchmark indices that best represent each category. we shall use Nifty 100 for large cap, Nifty Midcap 150 for mid cap and the Nifty Small cap 250 for small cap stocks. They represent the top 100, middle 150 and bottom 250 shares of the Nifty 500

If you'll look at the 10y rolling returns , NN50 beat the Nifty Midcap 150. When we assume small cap portfolio will beat a large cap portfolio, we also believe that many of the small cap stocks will become multi-baggers and go on to become a mid cap first and then a lareg cap. This is not the case. Not enough of them make the transition.

On the other hand, mid caps have done better. The mid cap companies have crossed the small cap barrier. So one can expect more mid caps to become large caps than small caps.
Syed Sagheer
Nov 26 2018 02:16 PM
The conclusion is diametrically opposite. It seems to me the average investor is better off choosing an index fund than hope that he has selected the right fund manager which is a statistical probability - bleak at best!

TLDR - Go with a passive fund, chances of choosing the wrong fund manager are lesser.
Gurpreet Singh
Oct 28 2018 01:41 PM
Well said Mr Kaustubh Mone. Passive funds have lower expense ratio as compared to active ones and thus in the long run maximize returns.
Kaustubh Mone
Oct 20 2018 03:01 PM
Fascinating analysis, many thanks for it. Personally I prefer actively-managed funds, so I was happy to read the headline. However, I would beg to differ with one of the conclusions that you have drawn.

If only 4 of the actively-managed large cap funds have outperformed their benchmark index, and in fact even the 5th-best such fund (out of a sample size of what must be close to fifty large cap funds) has underperformed, rather than concluding that "the key is to get the fund selection absolutely spot on", wouldn't the more robust conclusion be "don't go for actively managed large-cap funds", since less than 10% of them do better than the benchmark? Can we really rely upon getting this choice right, or indeed, count on those funds to continue to outperform, when it is quite evident that achieving this over-performance is an exception rather than the rule?

With multi-cap funds, the scope for alpha generation is definitely greater, and the chances of outperformance by an actively-managed fund are significantly higher, but if one is looking for large-cap funds, your data seem to suggest that passive funds are indeed the way to go...
Mutual Fund Tools