In the recent data of active and passive mutual funds in small and midcap categories, most of the actively managed funds are unable to beat passive funds in 3 or 5 years horizon.
Let’s check on this with data:
In the Midcap Category, considering the SIP returns:
In a 5 year period, only 7 out of 21 actively managed mutual funds have beaten the returns of Motilal Oswal Midcap Nifty 150 Index fund.
In a 3 year period, 10 out of 22 actively managed mutual funds have beaten the returns of Motilal Oswal Midcap Nifty 150 Index fund.
In the Smallcap Category, considering the SIP returns:
In a 5 year period, 9 out of 18 actively managed mutual funds have beaten the returns of Motilal Oswal smallcap Nifty 250 Index fund.
In a 3 year period, 7 out of 20 actively managed mutual funds have beaten the returns of Motilal Oswal smallcap Nifty 250 Index fund.
The data shows that in most of the cases, less than 50 percent of the actively managed funds have beaten the passive fund of the same category. In some cases, the passive fund return has beaten the category average return of actively managed funds, and in some cases it is somewhere around the category average return of actively managed funds.
In this case, a question might arise that ‘Is it better to shift to passive fund in small and midcap category?’
To answer this question, let’s consider the time post COVID 1st wave pandemic in the year 2020-21 when very few actively managed funds were beating passive fund in the large cap category, but if you check now, most of the actively managed funds are beating the benchmark or passive fund. The category average return is much higher than the benchmark.
We will have a time in future when most of actively managed mid and small cap funds beat the passive funds in their category.
So, to conclude Active and Passive mutual funds perform in cycles wherein sometimes active perform better and sometimes passive in all the categories. India will have a time long time in future when most of actively managed funds will never be able to beat passive funds over long term, but this is a long way to go. As of now, it would be a good decision to invest in actively managed fund, because when the cycle is in the favour of active funds, most of them beat passive funds by large margin.
Note: Please note that Motilal Oswal Index fund is considered for comparison here because this is the oldest index fund in the category. The analysis is done based on the data from ET money app.