Summary of this article
Passive funds have been favoured by many investors as they are simpler to understand.
Industry experts, however, warn that relying solely on passive investing may hinder investors’ ability to create wealth over the long-term by earning alpha through active funds.
Unlike the passive funds, active managers can adapt portfolios to evolving economic conditions, valuation cycles, earnings trends, and market opportunities.
Passive investing has seen increasing traction among investors in India over the years. Industry data reveal that the share of passive equity funds in total AUM jumped from 0.4 per cent in FY20 to 4.2 per cent in FY26. The growth has been primarily driven by investors dipping their toes into the markets for the first time.
Passive funds have been favoured by many investors as they are simpler to understand. Industry experts, however, warn that relying solely on passive investing may hinder investors’ ability to create wealth over the long term by earning alpha through active funds.
“Wealth creation is not just about participating in the markets, but it is about maximising returns through effective portfolio construction and active management, and this is where actively-managed funds have their advantage. Active funds are primarily managed by professional fund managers who use research-driven stock selection, sector allocation, and risk management strategies to identify opportunities that can outperform benchmark indices,” says Protima Dhawan, Director & Unit Head, Anand Rathi Wealth Limited.
Unlike the passive funds, active managers can adapt portfolios to evolving economic conditions, valuation cycles, earnings trends, and market opportunities. Additionally, currently India is a relatively under-penetrated and evolving market where inefficiencies and sectoral opportunities continue to exist, and such kinds of market conditions often create opportunities for skilled fund managers to generate alpha over the long term.
“For instance, consider that 10 years ago, two investors invested Rs 1 crore each in different funds in the same fund house with a similar underlying benchmark. An investor who invested Rs 1 crore in Nippon India Large Cap Fund (active fund) has seen his investment grow to Rs 3.8 crore today, whereas another investor who invested Rs 1 crore in a Nippon India Nifty 100 ETF, which tracks a similar benchmark, has grown to Rs 3.1 crore over the same period,” says Dhawan.
While both investments participated in the broader equity market growth, the actively-managed fund has generated additional alpha through active management’s research-driven stock selection and portfolio management, and it helped create an additional wealth of Rs 70 lakh on a Rs 1 crore investment.
This indicates how even modest annual outperformance can create a significant impact on the corpus over the long term. Thus, for investors, the best is to create a strategy-based portfolio through diversification across active, diversified equity categories like market-cap based funds and strategy-based funds like value, contra, focused, and dividend yield. This helps ride across market cycles and generate 2 to 3 per cent consistent alpha in the long term, which helps build substantial wealth over the long term.
“While passive investing may continue to attract new investors because of its simplicity, when it comes to long-term wealth creation, it requires a more active and strategic approach. Investors seeking to build substantial wealth should focus on diversified active fund portfolios that have the potential to generate consistent alpha and help create superior long-term returns beyond what benchmark indices can offer,” suggests Dhawan.
