Morningstar’s latest Active/Passive Barometer India shows that active-fund success varies sharply by category and investment horizon, challenging the idea that either active or passive investing is universally superior

The long-running debate between active and passive mutual funds has become increasingly relevant as Indian investors gain access to a wider range of index funds and ETFs alongside actively managed schemes.

Fresh data from Morningstar’s Active/Passive Barometer India shows that the outcome can vary significantly depending on the fund category and the investment period. While active managers recorded strong recent success in several equity categories, their long-term record was considerably more mixed.

The study covered 471 unique funds and compared active strategies with a composite of actual passive funds rather than a theoretical costless index. It also incorporated survivorship into the analysis, providing a broader view of how active strategies performed across different periods.

Large-Cap Funds Show a Sharp Long-Term Difference

Large-cap funds provide perhaps the clearest example of why investment horizon matters.

As of June 30, 2026, 87.9% of active large-cap funds had outperformed their passive peers over the preceding one year. The three-year success rate was also high at 86.7%.

However, the proportion dropped to 54.5% over five years and fell sharply to only 25.8% over 10 years.

In other words, nearly nine out of 10 active large-cap funds beat their passive counterparts over the latest one-year period, but only about one in four managed to do so over the decade-long period.

The contrast highlights an important point for investors: recent outperformance does not necessarily translate into persistent long-term outperformance.

Why Have Active Large-Cap Funds Done Better Recently?

Morningstar attributed part of the recent improvement to the divergence between the Nifty 50 and BSE Sensex universe and the Nifty Next 50.

Underperformance among some index heavyweights, particularly technology stocks, created greater opportunities for active managers to differentiate portfolios through stock selection and sector allocation.

When market leadership changes or dispersion between stocks increases, active managers can potentially benefit by reducing exposure to weaker companies and increasing exposure to relatively stronger businesses.

However, such opportunities can vary considerably from one market cycle to another.

Morningstar also cautioned that 10-year comparisons have limitations because passive strategies have shorter histories in several Indian fund categories.

Small-Cap Funds: Strong Five-Year Record, Uneven Short-Term Results

The small-cap category presents a different picture.

Over five years through June 2026, 75% of active small-cap funds beat their passive counterparts. However, the three-year success rate was only 29.2%.

Over the latest one-year period, the success rate jumped sharply to 93.3%.

This wide variation demonstrates how strongly the results can change depending on the measurement window.

Morningstar said the relatively broad opportunity set in the small-cap universe provides active managers with greater scope for bottom-up stock selection. The segment is also comparatively less researched, potentially creating more opportunities for differentiated research and portfolio positioning.

But the data also show that those advantages have not resulted in consistent outperformance across every period.

Mid-Cap Funds Remain More Challenging

Mid-cap funds have produced a considerably less favourable active-versus-passive record.

Only 41.4% of active mid-cap funds outperformed passive peers over three years, while the five-year success rate was just 33.3%. The one-year figure was substantially higher at 60%.

Morningstar pointed to the relatively constrained investment universe as one factor.

Fund managers are required to invest at least two-thirds of their portfolios in a universe of roughly 150 mid-cap stocks. That limits the range of companies available for differentiated positioning.

For investors, this means that the assumption that an active mid-cap manager automatically has greater scope to create alpha needs to be examined carefully against actual performance history.

Flexi-Cap Funds Show a Modest Active Advantage

The combined flexi-cap, focused and ELSS category produced a more balanced outcome.

The composite recorded an active success rate of 60.2% over one year and 56% over three years.

Flexi-cap strategies have greater flexibility to allocate across large-, mid- and small-cap companies, allowing fund managers to adjust portfolio positioning as market conditions change.

However, Morningstar cautioned that the passive cohort in this category has a relatively short history. The passive alternatives primarily track broad benchmarks such as the BSE 500 or NSE 500.

Therefore, the results need to be interpreted with some caution rather than viewed as definitive evidence of a persistent active-management advantage.

Banking and Financial Services Funds Tell a Different Story

Banking and financial-services funds have historically provided a stronger long-term environment for active management.

Over five years, 69.2% of active banking and financial-services funds beat passive peers. Over 10 years, the success rate was 66.7%.

However, the latest one-year result was only 31.8%.

Morningstar attributed the recent relative weakness partly to the strong performance of the PSU Bank Index, which benefited passive strategies tracking that segment and made it more difficult for active funds to outperform.

The category therefore illustrates another important feature of active-versus-passive comparisons: a strategy that has demonstrated long-term success can still underperform during a particular market regime.

The Debt Market Offers No Clear Winner Either

The active-versus-passive debate extends beyond equity mutual funds.

In government bond funds, active strategies recorded success rates of 55.6% over one year, 32% over three years, 56.5% over five years and 36.1% over 10 years.

Morningstar noted that changes in government bond yields, particularly at the longer end of the curve, influenced active managers' performance.

Active managers can potentially use duration positioning to respond to changes in interest rates and bond yields, but the effectiveness of that strategy depends heavily on the market environment during the period being measured.

What Does Morningstar Mean by 'Success Rate'?

One of the most important aspects of the study is its methodology.

Morningstar does not simply compare every active fund with a costless theoretical index.

Instead, active funds are compared with a composite of actual passive funds, after considering their costs. The analysis also takes fund survivorship into account.

The success rate represents the percentage of funds that both survived the measurement period and generated returns above the asset-weighted average return of the passive-fund comparison group.

This distinction matters because the outcome can differ substantially from a simple comparison with an index return.

A fund that narrowly beats the passive composite is counted as a success in the same way as a fund that significantly outperforms it.

Why the Investment Horizon Matters

The Morningstar numbers demonstrate that the answer to the active-versus-passive question can change dramatically depending on the time period.

Large-cap funds are the clearest example. Active funds had an 87.9% success rate over one year, but only 25.8% over 10 years.

Small-cap funds produced a 75% success rate over five years but only 29.2% over three years.

Banking funds showed 66.7% success over 10 years but only 31.8% over one year.

These differences suggest that investors should be cautious about extrapolating recent performance into the future.

Active Funds: Where Stock Selection Can Matter

The potential advantage of active management is its ability to deviate from an index.

A fund manager can potentially reduce exposure to expensive companies, increase allocations to businesses with stronger fundamentals, adjust sector weights and identify companies that may not yet have significant index representation.

That flexibility can become particularly relevant in segments where there is greater dispersion between companies or where research coverage is relatively limited.

The small-cap data provide an example of this potential opportunity.

However, flexibility also introduces the possibility of making the wrong calls. A manager can underweight a strong-performing stock or sector and thereby lag a passive strategy.

Passive Funds: The Case for Consistency and Cost Awareness

Passive strategies follow a different philosophy.

Rather than attempting to identify future winners, index funds and ETFs seek to replicate a specified market benchmark. This reduces the dependence on individual stock-picking decisions.

For investors, the attraction can include transparency, predictable portfolio construction and generally lower dependence on manager selection.

But passive investing also means accepting the composition and performance of the underlying index. If a particular sector or group of stocks has a large weight in an index, passive investors remain exposed to that structure.

The banking-fund example in Morningstar's study illustrates how a strong-performing index segment can materially influence relative results.

What Investors Should Examine Before Choosing a Fund

The latest data suggest that investors should look beyond a fund's most recent return.

1. Investment Horizon

A one-year performance number may not provide enough evidence to judge the durability of an investment strategy.

2. Category Characteristics

Large-cap, mid-cap, small-cap, banking and flexi-cap funds operate in very different investment environments. The scope for active management varies accordingly.

3. Consistency

A fund that has outperformed its benchmark or passive peers across multiple market cycles may provide more useful evidence than one that has delivered a single period of strong performance.

4. Costs

Investors should consider the total cost of ownership because even relatively small differences in expenses can influence long-term compounding.

5. Portfolio Construction

For active funds, investors can examine concentration, sector allocation, turnover and the fund manager's investment approach. For passive funds, the underlying index, tracking difference and expense ratio become important considerations.

6. Manager and Strategy Continuity

Historical performance may become less comparable if the fund's manager, investment process or portfolio strategy has changed materially.

The Bigger Lesson From the Data

The Morningstar study does not establish that active funds are universally better or worse than passive funds.

Instead, it shows that the relative outcome depends on the category, market environment and measurement period.

The strongest recent numbers for active large-cap and small-cap funds coexist with much weaker long-term results in some of the same categories. Conversely, banking and financial-services funds have demonstrated relatively strong long-term active success despite weak recent results.

That divergence is important because investment decisions based solely on the latest one-year rankings can overlook the longer-term behaviour of a strategy.

Mutual Fund Outlook

India's expanding mutual-fund ecosystem gives investors an increasing choice between actively managed funds, index funds and ETFs. Morningstar's latest data suggest that the active-versus-passive decision should be approached through the lens of category, costs, investment horizon and consistency rather than a blanket preference for either approach.

For large-cap investors in particular, the sharp difference between the 87.9% one-year and 25.8% 10-year active success rates is a reminder that short-term outperformance can look very different from long-term persistence.

Ultimately, the Morningstar findings support a more nuanced approach: investors should evaluate the objective of the portfolio, the characteristics of the category, the costs involved and the consistency of the strategy over an appropriate investment horizon before selecting between active and passive funds.