Every year, S&P Global publishes the SPIVA India Scorecard | a rigorous analysis of how many actively managed Indian equity funds beat their benchmark over various time periods. The numbers are damning for active management. And yet the industry continues to market actively managed funds aggressively, because the fees on active funds are dramatically higher than on passive ones.
This module lays out the evidence clearly, explains why active underperforms, identifies the narrow conditions where active might win, and positions systematic factor investing as a distinct third option beyond the passive vs active binary.
- Expense ratio 44%
- Trading cost 28%
- Cash drag 18%
- Bad security selection 10%
- Passive core 56%
- Systematic factor 24%
- Selected active 20%
The SPIVA India evidence
SPIVA (S&P Indices Versus Active) measures the percentage of active funds that underperform their benchmark index over various time horizons. The Indian data is consistent with global findings:
The pattern is consistent: the longer the time horizon, the worse active funds look relative to their benchmark. The few funds that beat their benchmark in year 1 are largely different from the ones that beat it in year 3 | performance persistence is minimal.
SPIVA India Scorecard | S&P Global (annual publication)Why active underperforms | the arithmetic
William Sharpe (1991) proved this mathematically: before costs, the average actively managed rupee must earn the market return | because active managers collectively own the market. After costs, the average active fund must underperform by the amount of those costs.
The cost differential between active and passive in India:
| Product | Typical TER (direct) | Annual cost on ₹10L | 20-year drag on ₹10L at 12% gross |
|---|---|---|---|
| Active large-cap (direct) | 0.8 to 1.2% | ₹8,000 to 12,000 | ₹22 to 35L |
| Index fund (direct) | 0.1 to 0.2% | ₹1,000 to 2,000 | ₹3 to 6L |
| Nifty 50 ETF | 0.03 to 0.07% | ₹300 to 700 | ₹1 to 2L |
| Active regular plan | 1.5 to 2.5% | ₹15,000 to 25,000 | ₹40 to 70L |
For a fund manager to justify a 1% active fee, they need to generate at least 1% annual alpha before your hands. The SPIVA data shows most don't. The regular plan cost (with distributor commission) makes the challenge even harder.
When might active win? The narrow cases
The evidence against active is strongest in large-cap Indian equities | a heavily covered, liquid, efficiently priced market. The case for active is somewhat stronger in:
- Mid and small-cap segments: Less analyst coverage, more information asymmetry, more pricing inefficiency. A skilled active manager in the small-cap space has a larger opportunity set. SPIVA data shows better active persistence in mid/small-cap categories.
- Credit/debt investing: Fixed income analysis is complex and idiosyncratic. A good credit analyst genuinely adds value in corporate bond selection in ways that are harder in equity markets.
- Very specific niche strategies: Activist investing, special situations, deep value in unlisted companies | these aren't available through passive funds at all.
The honest summary: If you're investing in large-cap Indian equities | where Nifty 50 and Nifty 100 ETFs give you cheap, diversified, benchmark-aligned exposure | active management is very hard to justify. In mid and small-cap segments, the evidence is less clear-cut. But the cost drag still means you need meaningful alpha generation just to break even with a passive alternative.
Where factor investing sits | the third option
Systematic factor strategies like those on RupeeCase are neither purely passive nor purely active. The spectrum looks like this:
RupeeCase factor strategies sit between passive index ETFs (zero alpha ambition, zero human judgment) and active mutual funds (human judgment, high fees, poor persistence). They are rules-based like passive, alpha-seeking like active. The difference from active: the rules are documented, tested on 20 years of NSE data, and don't depend on the skill of a specific fund manager. The strategies are available at invest.rupeecase.com.
Glossary
- SPIVA
- S&P Indices Versus Active | an annual scorecard published by S&P Global showing the percentage of actively managed funds that underperformed their benchmark index over 1, 3, 5, and 10 year periods.
- Active management
- Fund management where the portfolio manager selects securities with the aim of outperforming a benchmark. Typically charges higher fees than passive funds.
- Passive investing
- An investment approach that replicates a market index rather than selecting securities. Aims to match, not beat, the benchmark. Very low cost.
- Factor investing
- A rules-based approach that tilts a portfolio toward documented return factors (momentum, quality, value, low volatility) to earn factor premia above the benchmark return.
- Performance persistence
- The tendency of top-performing funds to continue outperforming in subsequent periods. Academic evidence shows persistence is minimal in active equity funds.
Sources & further reading
- → SPIVA India Scorecard | S&P Global (annual)
- → Sharpe, W.F. (1991). The Arithmetic of Active Management. Financial Analysts Journal.
- → AMFI India | Mutual Fund Industry Data
- → NISM Series V-A | Mutual Fund Distributor (active vs passive chapter)
Quick check, Module 6.5
Active vs Passive Break-Even
Active fund needs to deliver enough alpha to clear its TER spread. Compounded over years the gap is large. SPIVA India shows fewer than 1 in 5 active funds clear it.