MF News Are actively managed funds generating alpha?

Are actively managed funds generating alpha?

Only 3 out of 10 actively managed equity funds outperformed their benchmarks in five-year period.

Nishant Patnaik Apr 22, 2025

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An analysis of five-year performance of equity funds ending on March 2025 reveals that 34% of actively managed equity funds managed to outperform their respective benchmarks during this period.

Out of the 293 actively managed schemes with a five-year track record, only 100 schemes generated alpha.

The outperformance was largely concentrated in contra funds, dividend yield funds and value funds.

All four contra funds delivered alpha over the five-year period ending March 2024, reflecting a 100% outperformance rate.

Next was dividend yield funds with outperformance rate of 83%. Here 5 out of 6 schemes beat their benchmark. Value funds stood at the third spot with outperformance rate of 79% or 11 out of 14 generated alpha in five years.

In contrast, in some of the most popular fund categories like small cap funds, large cap funds and large & mid cap funds, the beating of the benchmark was significantly lower.

Only 2 out of 21 small cap funds outperformed their benchmark – a mere 10% success rate.

While just 20% of large cap funds managed to beat their respective index, this proportion was 21% in large & mid cap funds.

Outperformance summary in terms of number of schemes:

Fund categories	Total number of schemes	Outperforming Schemes	Category outperformance %
Contra funds	4	4	100%
Dividend yield funds	6	5	83%
Value funds	14	11	79%
Sectoral funds	83	37	45%
ELSS	37	13	35%
Focussed funds	20	6	30%
Multi cap funds	9	3	33%
Flexi cap funds	23	5	22%
Mid cap funds	24	5	21%
Large and midcap funds	25	5	20%
Large cap	26	4	15%
Small cap funds	21	2	10%
Equity total	293	100	34%

Category average performance

In terms of category average performance, only three categories of actively managed equity funds consistently generated alpha over five year period ending March 2025 - contra funds, value funds and dividend yield funds.

Among all equity fund categories, contra funds delivered a 5-year CAGR of 32%, outperforming their benchmark (27%) by 4.53%.

While value funds generated an alpha of 2.63%, dividend yield funds also delivered an alpha of 2.63% in five years.

On the other hand, several popular fund categories like mid cap funds, focussed funds and large cap funds underperformed their benchmark by a significant margin.

Mid cap funds underperformed its benchmark by close to 4% in five years. While focussed funds lagged behind the benchmark by 2.55%, such an underperformance rate was 2.16 in large cap funds in five years.

Overall, if we take the category average performance of all equity schemes, the actively managed funds underperformed its benchmark by 0.60% in five year period ending on March 2025.

Let us look at the table to know more:

Fund categories	Category average return of fund	Category average return of benchmark	Total AUM	Alpha in %
Contra funds	31.93	27.43	127167	4.5
Value funds	28.95	26.32	114044	2.63
Dividend yield	28.44	26.27	13894	2.17
Sectoral	27.45	27.55	256280	-0.1
Multi cap funds	27.78	28.6	77727	-0.82
ELSS	25.24	26.31	233683	-1.07
Flexi cap funds	24.49	26.31	382973	-1.82
Small cap	35.23	37.2	280994	-1.97
Large and mid cap funds	27.03	29.11	256975	-2.08
Large cap	22.03	24.19	352102	-2.16
Focussed funds	23.78	26.33	130165	-2.55
Mid cap funds	30.79	34.63	360579	-3.84
Category total	27.76	28.35	2586583	-0.59

These results once again underline the role of passive funds. In fact, Cafemutual is organizing the Cafemutual Passives Conference to raise awareness about the growing importance of passive investing.

Venue: Taj Santacruz, Mumbai

Date: May 23, 2025

Theme: "The Passives Revolution: Future of Low-Cost, High-Impact Investing"

The conference will feature leading industry experts who will share their insights on emerging trends, opportunities, and innovations in the world of passive funds.

Visit cafemutualevents.com to learn more and register.

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8 Comments

anil patel · 1 week ago `

to make it really interesting, also update passive Index funds performances , then only true picture reflects, because Index/ index ETF are only alternative to Actively managed funds..

Ashoke Kumar Basu · 1 week ago `

A proper comparison between active & passive funds can only depicts the real competency & expertise of fund managers, which is actually required for investors during investment decision making process, i.e., whether to go for investment into active or passive fund.

krisha mf · 1 week ago `

March data is presented on the 22nd. Six small-cap funds have outperformed their benchmark as of today, April 24, 2025, which is a 27% success rate. In the same way, 8 out of 12 outperformed the benchmark, or a 66% success rate, if we look at a 10-year period. Investors must also realise that they cannot directly invest in Nifty 250 Small TRI. You must invest in an index fund or exchange-traded fund (ETF), as tracking error causes returns to be lower than the actual index. Therefore, it is humbly requested that investors be provided with accurate information, facts, and knowledge before allowing them to make their own decisions.

Andrew D Cunha · 1 week ago `

May I know what is the bench mark you used to compare small cap funds? What is the alternative passive fund for small cap fund? I find the comparison with the benchmark in your article a bit unclear. I reviewed four small-cap funds that I recommend to clients based on their risk profiles, and all four have considerably outperformed the Nifty Smallcap 250 TRI over a 5-year period. In light of this, I’m not sure how the article concludes that only two funds have outperformed the benchmark. Could you please clarify the methodology or selection criteria used? As you are trying to push the role of Passive Funds, above information is very important for MFDs and also investors.

Nishant Patnaik · 1 week ago

The data is taken from AMFI and it is first tier benchmark

Andrew D Cunha · 1 week ago

Thank you for the kind reply Sir. I had a clarification and a concern.

The article seems to pitch the role of passive investing in the small-cap space, stating that most small-cap funds have underperformed the benchmark. However, the comparison being made is with the BSE SmallCap Index.

As far as I know, there is no passive fund or ETF currently tracking the BSE SmallCap Index. The only widely available small-cap passive funds in India are based on the Nifty Smallcap 250 TRI.

Now, if we look at the performance data, most actively managed small-cap funds have outperformed the Nifty Smallcap 250 TRI, even after adjusting for costs. This raises a valid question:
If the passive fund being offered is based on Nifty Smallcap 250 TRI, which has underperformed most active funds, how does that support the argument in favor of passive investing in this segment?

It would be helpful to understand the rationale behind this positioning, especially when the benchmark being used for comparison isn’t actually the one that passive investors can access.

Rohit Grover · 1 week ago `

is March 2020 a good benchmark to track alpha on 5 year scale, since market had badly crashed, there may be a possibility that the fund had fallen less than benchmark.

Always track data from peak to peak, like from Jan 2018 when large, mid and small all were around all time high till Sep'24

Nishant Patnaik · 1 week ago

A five-year performance period is a reliable time frame for comparing equity funds, regardless of market conditions.

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