Even though we’re past mid-2025, the debate between active and passive mutual funds continues to captivate investors. Active funds aim to outperform market benchmarks through expert management, while passive funds seek to mirror index performance with lower costs. This comprehensive analysis explores the differences, performance trends, investor behavior, and future outlook for both approaches in the Indian market, with a focus on which might be more advantageous in 2025.
Understanding Active and Passive Mutual Funds
Active Mutual Funds
Active mutual funds are managed by professional fund managers who actively select securities to outperform a specific benchmark, such as the Nifty 50 or Sensex. These managers conduct in-depth research, analyse market trends, and make strategic buy and sell decisions to generate “alpha” (returns above the benchmark). However, this active management comes with higher expense ratios, typically ranging from 0.5% to 2.5%, and carries the risk of underperformance if the manager’s decisions falter.
Passive Mutual Funds
Passive mutual funds, including index funds and Exchange-Traded Funds (ETFs), aim to replicate the performance of a market index like the Nifty 50. These funds hold the same stocks in the same proportions as the index, requiring minimal active management. As a result, they have lower expense ratios, ranging from 0.02% to 0.2%. The objective is to match the index’s returns, providing investors with market-aligned performance and reduced risk from managerial errors.
Key Differences
The following table summaries the key differences between active and passive mutual funds:
| Aspect | Active Funds | Passive Funds |
| Definition | Managed by experts aiming to surpass the benchmark index. | Designed to replicate the performance of an index like Nifty 50 or Sensex. |
| Goal | Outperform the benchmark index. | Match the benchmark index’s performance. |
| Expense Ratio | 0.5% to 2.5% depending on fund type. | 0.02% to 0.2%. |
| Management | Fund managers actively select securities based on market conditions and research. | Tracks market indices with minimal management intervention. |
| Cost | Higher due to research and trading activities. | Lower as they follow the index without active selection. |
| Nature | Dynamic and flexible, adapting to market changes. | Static, adhering to the index’s composition. |
| Risk | Higher due to reliance on manager’s skill and potential errors. | Relatively lower, as it mirrors the index with lower volatility. |
| Returns | Aim for higher returns but may lag; not guaranteed. | Market-aligned returns with minimal deviation from the index. |
Performance Comparison in India
2024 Performance
In 2024, the Indian mutual fund market saw significant activity, with active funds demonstrating notable success. According to Kuvera, 70% of equity mutual funds (183 out of 263) outperformed their benchmarks in 2024. The Nifty 50 index gained 8.8%, and the Sensex rose by 8.2%. Categories like contra funds (100% success rate), value funds (85%), and large and mid-cap funds (78%) showed strong outperformance, while small-cap funds had a lower success rate of 44%.
Three-Year Performance (2022–2025)
Over the three-year period ending mid-2025, active large cap funds have shown competitive performance compared to passive funds. For instance, the UTI Nifty 50 Index Fund delivered an annualised return of 18.2%. In contrast, top active large cap funds outperformed significantly:
- Nippon India Large Cap Fund: 25.4%
- ICICI Prudential Bluechip Fund: 22.26%
- DSP Large Cap Fund: 23.42%
Even after accounting for higher expense ratios (e.g., 0.65% for Nippon India’s direct plan), active funds often provided higher net returns. For example, Nippon India’s net return after fees is approximately 24.75%, compared to UTI Nifty 50’s 18.01% (expense ratio 0.19%). However, not all active funds succeed, and performance varies based on the fund manager’s expertise and market conditions. Passive funds, such as the DSP Nifty 50 Equal Weight Index Fund, achieved a 22.11% three-year return, but this fund uses an equal-weight strategy, differing from the market-cap-weighted Nifty 50.
2025 Performance Insights
In June 2025, equity funds continued to perform strongly, with many active funds achieving impressive 1-year returns, indicating the potential for alpha generation in a dynamic market environment. For example, top-performing active equity funds in categories like large and mid-cap funds showed consistent outperformance, with over 90% of category leaders maintaining their rankings from previous periods. Debt funds, however, faced challenges due to higher bond yields, resulting in subdued short-term returns, though longer-term performance remained stable for well-managed funds. Passive funds, particularly index funds and ETFs, continued to attract investors with their low-cost structure, with the AUM of passive funds reaching ₹11.2 lakh crore by September 2024 and expected to grow further in 2025.
The Evolving Landscape of Mutual Funds in India in 2025
Industry Growth
The Indian mutual fund industry has experienced remarkable growth, with the AUM reaching Rs 72.20 trillion by May 31, 2025, a significant leap from Rs 61.16 trillion in June 2024. This growth is driven by rising investor awareness, favourable market conditions, and robust regulatory frameworks by the Securities and Exchange Board of India (SEBI). Projections estimate the industry’s AUM to reach USD 0.78 trillion in 2025, with a CAGR exceeding 18% through 2030, potentially reaching USD 1.78 trillion by 2030.
Retail Investor Participation
Retail investor participation has surged, with the total number of mutual fund folios reaching 23.83 crore by May 31, 2025. This expansion reflects growing financial literacy and accessibility, particularly in Tier 2 and Tier 3 cities, where Systematic Investment Plans (SIPs) have become a popular investment vehicle. SIPs allow investors to invest fixed amounts regularly, mitigating market volatility and fostering disciplined investing.
Digitalisation and Accessibility
Digitalisation has transformed the mutual fund industry, making it easier for investors to research, invest, and monitor their portfolios. Fintech platforms and mobile applications have democratised access to mutual funds, attracting both new and seasoned investors. This trend has particularly boosted the adoption of passive funds, which are often marketed as simple, cost-effective options for retail investors.
Investor Preferences and Behaviour
Mixed Approach
Indian investors in 2025 are adopting a mixed approach, balancing active and passive funds to optimise returns and manage risk. Passive funds are gaining traction due to their low costs and transparency, particularly among investors seeking simplicity and long-term stability. Active funds, however, remain popular among those who believe in the potential for higher returns through skilled management, especially in small and mid-cap segments.
Cultural and Economic Influences
The Indian market’s diversity and complexity favour active management, as skilled fund managers can exploit market inefficiencies to identify undervalued stocks or emerging trends. Indian investors often prioritise higher returns to combat inflation and meet long-term goals like education or retirement, making active funds appealing despite higher fees. However, growing awareness of passive investing’s benefits, particularly in large-cap segments, is shifting preferences, especially among younger, tech-savvy investors.
Systematic Investment Plans (SIPs)
The popularity of SIPs reflects a disciplined, long-term investment approach. In FY25, SIP contributions grew significantly, with investors showing a preference for longer-term commitments despite market fluctuations. This trend supports both active and passive funds, as SIPs can be tailored to either strategy, allowing investors to benefit from rupee cost averaging.
Trends and Developments in 2025
Growing Popularity of Passive Funds
Passive investing’s market share in India has grown from 2% to 16% since 2015, driven by low expense ratios (as low as 0.02% for some ETFs) and consistent returns. The AUM of passive funds reached ₹11.2 lakh crore by September 2024, representing 17% of total mutual fund AUM, and is projected to reach ₹25 lakh crore by March 2025. The rise in new fund offers (NFOs), with 63 passive schemes launched in the first seven months of 2024, underscores this trend.
Active Funds’ Edge in India
Despite the rise of passive funds, active funds maintain a strong presence due to India’s market inefficiencies, particularly in small and mid-cap segments. Unlike mature markets like the US, where 85% of active managers underperformed in 2021, Indian active managers have historically outperformed benchmarks, especially in less efficient market segments.
Regulatory Environment
SEBI’s regulations have enhanced transparency and investor protection, making both active and passive funds more appealing. Initiatives like mandatory risk disclosures and standardised performance reporting have empowered investors to make informed decisions, levelling the playing field for both strategies.
2025 Forecast
In 2025, India’s economic growth and market inefficiencies suggest active funds could continue to outperform in small and mid-cap segments. However, the increasing efficiency of large-cap markets and the cost advantage of passive funds may narrow the performance gap. Global trends, such as Goldman Sachs’ forecast of lower S&P 500 returns (3% annually over the next decade), indicate that active strategies may gain importance in markets with limited passive returns, but India’s robust growth may favor both approaches.
The Role of Technology and Platforms like Altifi
Technological innovations are reshaping the mutual fund landscape, offering investors advanced tools to enhance their investment experience. Altifi stands out as an emerging platform that could revolutionise mutual fund investing. Investors can use Altifi to evaluate active and passive funds, analyse expense ratios, and understand market volatility’s impact, making it easier to align investments with their goals. Its user-friendly interface appeals to both seasoned and new investors, democratising access to sophisticated tools.
As the mutual fund industry becomes more competitive, platforms like Altifi are poised to play a pivotal role in attracting and retaining investors by offering innovative solutions tailored to India’s evolving financial landscape.
Conclusion: Which Approach Wins in 2025?
The choice between active and passive mutual funds in 2025 depends on individual investor goals, risk tolerance, and investment horizons:
- Passive Funds are ideal for cost-conscious investors seeking market-aligned returns with minimal management risk. Their low expense ratios and growing popularity make them a strong choice for long-term, hands-off investing.
- Active Funds offer the potential for higher returns, particularly in India’s small and mid-cap segments, but require careful selection of funds with skilled managers. Their higher fees and risks are justified when consistent outperformance is achieved.
- Balanced Approach A diversified portfolio combining active and passive funds may provide the best of both worlds, balancing cost efficiency with the potential for alpha.
The performance data from 2024 and 2025 suggests that active large cap funds have an edge in India, with top funds outperforming the Nifty 50 index. However, the rapid growth of passive funds and their cost advantages cannot be ignored. Investors should leverage platforms like Altifi, consult financial advisors, and assess their financial goals to make informed decisions in 2025’s dynamic market.
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