Mutual Funds

Index Funds vs Mutual Funds: Only 15% of Large-Cap Funds Beat the Index

S&P's latest India scorecard says 84.85% of active large-cap funds trailed their benchmark over five years. Here is what the numbers do and do not prove.

By The Indian Markets Desk 11 min read

Eighty-five out of a hundred fund managers missed#

Twice a year S&P Dow Jones Indices publishes a report the Indian fund industry would rather you skipped. The SPIVA India Mid-Year 2026 Scorecard, covering periods ending 30 June 2026, found that 84.85% of active large-cap equity funds failed to beat their benchmark over five years. Over ten years, 74.03% failed.

Put the other way round: about fifteen large-cap funds in a hundred earned their fee. You had to pick one of those fifteen in 2021 and stay with it.

This matters because of where the money is going. Indian mutual funds held 87.08 lakh crore rupees at the end of August 2026, of which 15.42 lakh crore sat in passive schemes. Equity index funds held 2,51,238 crore and took in another 2,393 crore that month, while 10.02 crore SIP accounts pushed in 32,297 crore. Much of that money is choosing between active and passive without ever seeing the scorecard.

What a benchmark is, and why the question is framed wrongly#

People search for "index funds vs mutual funds", but an index fund is a mutual fund. The real split is between active and passive management.

An active fund employs a manager and analysts who pick stocks, hoping to beat a reference basket. That basket is the benchmark, an index such as the Nifty 50. A passive or index fund picks nothing. It buys the whole basket in the same proportions and takes whatever the basket returns.

Two terms do most of the work here. The first is total expense ratio, or TER: the annual cost of running the scheme, charged as a percentage of your money and deducted daily from the net asset value. You never see a bill. It simply lowers your return.

The second is total return index, or TRI. A price index tracks only share prices. A total return index adds dividends back in, and the gap is not trivial. The Nifty 50 factsheet for 31 August 2026 shows the price index returned 7.05% a year over five years against 8.32% for the total return version. Since SEBI's circular of 4 January 2018, funds must be measured against total return benchmarks, which removed an easy flattery from the old comparisons.

SPIVA compares fund returns after fees against these benchmarks, adjusts for funds that closed or merged, and reports the share that came up short.

The five-year scorecard, category by category#

Share of active funds that failed to beat their benchmark
India, periods ending 30 June 2026

Large-cap equity      5yr   84.8%  ##################################
                     10yr   74.0%  ##############################
ELSS (tax-saving)     5yr   70.7%  ############################
                     10yr   80.5%  ################################
Mid-/small-cap        5yr   54.9%  ######################
                     10yr   81.7%  #################################
Government bond       5yr   91.3%  #####################################
                     10yr   75.0%  ##############################
Composite bond        5yr   75.5%  ##############################
                     10yr   92.7%  #####################################
                                   +---------+---------+---------+---------+
                                   0%       25%       50%       75%     100%

Source: SPIVA India Mid-Year 2026 Scorecard, S&P Dow Jones Indices. Bars start at zero.

Large-cap is the worst equity category, and it has been bad for a while. The year-end 2025 scorecard put five-year large-cap underperformance at 84.4%, the mid-year 2025 edition at 89.66%. This is not one bad stretch.

Bond funds are worse than equity funds and nobody talks about it. Over ten years 92.65% of composite bond funds trailed the iBoxx ALBI India index. Debt returns are thinner, so a one percent fee bites harder.

Survivorship flatters everything. Of the government bond funds running ten years ago, only 57.50% still exist. The rest merged or closed, usually after poor runs. Look only at funds on sale today and you are reading a list of survivors.

Where the missing 1.04 percentage points go#

The headline percentage tells you how many funds lost. The size of the loss is more useful. Over five years to June 2026 the average large-cap fund returned 10.76% a year while the S&P India LargeMidCap index returned 11.80%, a shortfall of 1.04 percentage points a year. That lands almost exactly where the fee sits.

Under the expense rules approved by SEBI's board on 17 December 2025, an equity scheme holding less than 500 crore rupees may charge a base expense ratio of 2.10%, falling in steps to 0.95% for schemes above 50,000 crore. An index fund or ETF is capped at 0.90%, down from 1.00%, though the old cap included statutory levies and the new one does not, so the real cut is smaller than it looks. Large index funds charge a fraction of the cap anyway. A ceiling is not a price.

What does 1.04 percentage points cost? Take a 10,000 rupee monthly SIP running twenty years. At 11.80% a year it grows to about 97.25 lakh rupees, at 10.76% to about 84.62 lakh. The difference of roughly 12.63 lakh never appears on a statement. These are my calculations for illustration and assume steady returns, which real markets do not deliver.

Index fund marketing skips the other half of the arithmetic. An index fund does not hand you the index either. You get the index minus the expense ratio minus tracking error, the drift caused by cash balances, dividend timing and rebalancing costs. SEBI's circular on the development of passive funds of 23 May 2022 caps annualised tracking error for equity index funds and ETFs at 2%. A cap is not a promise. Check the figure before you buy.

Mid and small caps are the exception, with a catch#

The mid- and small-cap column breaks the pattern. Only 54.90% trailed over five years, and the average fund returned 17.54% a year against 16.74% for the S&P India SmallCap benchmark. On average the managers won.

Two readings are possible, and I lean towards the second. The generous one is that mid- and small-cap India is genuinely less efficient. Fewer analysts cover these companies, disclosure is patchier, and a manager who reads annual reports properly can find what the market missed.

The sceptical one is about the yardstick. SPIVA measures this category against a small-cap index, while Indian mid- and small-cap funds typically hold a mix that includes larger, steadier companies. When mid-caps beat small-caps, the funds look clever. That is a benchmark artefact, not skill. And over ten years, 81.67% of these funds still lost. The five-year win does not survive the decade.

Both can be partly true. Treat the mid-cap result as interesting rather than settled.

What the 2026 rule changes do to the argument#

Two SEBI decisions this year bear on the choice.

From 1 April 2026 the SEBI (Mutual Funds) Regulations, 2026 replaced the single total expense ratio with a layered structure. AMFI now publishes scheme-wise costs split into base expense ratio under Regulation 66(7), brokerage under 66(9), transaction costs under 66(10), and statutory levies shown separately. Base ratios fell by 10 to 15 basis points across the slabs, and brokerage limits were cut to 6 basis points in the cash market and 2 on derivatives. Active management got cheaper. It did not get cheaper than passive.

On 26 February 2026 SEBI issued a fresh categorisation circular reorganising schemes into equity, debt, hybrid, life cycle and other categories, with six months to comply. A large-cap fund must still hold at least 80% of its assets in large-cap stocks, a constraint first imposed by the 2017 categorisation circular. That is what explains the scorecard. When a manager must own mostly the same hundred companies as the index, charge more, and still beat it, the maths is unkind.

Investors have noticed. Passive assets reached 14.63 lakh crore rupees across 740 schemes by the end of FY26, about 18% of the industry, with folios up around 40% in a year. None of this says active management is pointless. It says the odds vary sharply by category, and the large-cap end is where they are worst.

Key takeaways#

  1. Over the five years to June 2026, 84.85% of Indian active large-cap funds trailed their benchmark, and 74.03% trailed over ten years.
  2. The average large-cap fund returned 10.76% a year against 11.80% for the index. On a 10,000 rupee SIP over twenty years that gap works out to roughly 12.63 lakh rupees.
  3. Mid- and small-cap funds beat their benchmark on average over five years, but 81.67% lost over ten, and the benchmark choice is disputed.
  4. Debt funds fare worst of all. Over ten years 92.65% of composite bond funds lost to their index, because a percentage point of fee is a larger share of a smaller return.
  5. SEBI's April 2026 rules cut base expense ratios and cap index funds and ETFs at 0.90%, but an index fund still returns the index minus costs and tracking error, not the index.

Frequently asked questions#

Is an index fund a mutual fund? Yes. An index fund is a mutual fund scheme that tracks an index instead of picking stocks. The meaningful comparison is active against passive, not index funds against mutual funds.

Does SPIVA prove active funds are bad? It shows most of them lost to their benchmark over these periods, after fees. It does not identify which will win next, and it measures categories, not your particular fund.

Why are large-cap funds the worst performers? SEBI requires a large-cap fund to keep at least 80% of assets in large-cap stocks, so its portfolio resembles the index. The fee gap then has to be overcome by stock picking within a narrow pool.

Should I switch out of my active fund? That is for you and a qualified adviser to judge, and it depends on your holding, gains and tax position. Selling equity units held over a year triggers long-term capital gains tax, so a switch costs more than the fund.

How do I check what my fund costs? AMFI publishes scheme-wise expense data monthly, split into base expense ratio, brokerage, transaction costs and levies. Direct plans cost less because they exclude distributor commission.

Do index funds track the index exactly? No. Cash holdings, dividend timing and rebalancing costs create tracking error, which SEBI caps at 2% annualised for equity index funds and ETFs. Funds disclose their tracking error, and lower is better.

Are ETFs the same as index funds? Both are passive, but an ETF trades on the exchange like a share and needs a demat account, while an index fund is bought at the day's NAV. ETF buyers also pay the spread between buying and selling prices.

Glossary#

Benchmark. The index a fund is measured against. SEBI has required total return benchmarks since 2018.

TER, total expense ratio. The annual cost of running a scheme, deducted daily from NAV rather than billed.

BER, base expense ratio. Under the 2026 regulations, the fund house's own costs, shown separately from brokerage, transaction costs and levies.

TRI, total return index. An index that includes dividends as well as price movement.

Tracking error. The drift between an index fund's return and its index, measured as the standard deviation of the difference.

Survivorship bias. The distortion from looking only at funds that still exist. Poor performers tend to be merged or closed.

Equal-weighted return. The simple average across all funds in a category, giving a small fund the same weight as a large one.

References#

  1. S&P Dow Jones Indices, SPIVA India Scorecard, Mid-Year 2026, periods ending 30 June 2026
  2. S&P Dow Jones Indices, SPIVA India Scorecard, Year-End 2025
  3. S&P Dow Jones Indices, SPIVA India Scorecard, Mid-Year 2025
  4. Association of Mutual Funds in India, AMFI Monthly Note, August 2026
  5. Association of Mutual Funds in India, Total Expense Ratio of mutual fund schemes
  6. Securities and Exchange Board of India, PR No. 84/2025, board meeting of 17 December 2025
  7. Securities and Exchange Board of India, SEBI (Mutual Funds) Regulations, 2026, effective 1 April 2026
  8. Securities and Exchange Board of India, Categorisation and Rationalisation of Mutual Fund Schemes, circular of 26 February 2026
  9. Securities and Exchange Board of India, Categorization and Rationalization of Mutual Fund Schemes, circular SEBI/HO/IMD/DF3/CIR/P/2017/114, 6 October 2017
  10. Securities and Exchange Board of India, Circular on Development of Passive Funds, SEBI/HO/IMD/DOF2/P/CIR/2022/69, 23 May 2022
  11. Securities and Exchange Board of India investor portal, Understanding tracking error
  12. NSE Indices, Nifty 50 index factsheet, 31 August 2026
  13. Securities and Exchange Board of India, Benchmarking of Scheme's performance to Total Return Index, 4 January 2018
  14. Moneylife, SEBI: tracking error of equity ETFs and index funds cannot exceed 2%
  15. Cafemutual, A snapshot of passive mutual funds in 2026, 12 May 2026
  16. Google Ads search volumes for India, retrieved through DataForSEO, 23 September 2026

This article is journalism, not financial advice. SIP figures are the author's calculations for illustration and assume constant returns. Past performance does not predict future returns. Check the current scheme documents and consult a qualified adviser about your own circumstances.