When it comes to investing, few debates stir as much discussion as active vs passive investing. Active fund managers promise alpha—returns above the benchmark—while passive funds, like index funds, simply mirror the market at minimal cost.
So, should index funds form part of your portfolio? The latest SPIVA India Scorecard (Mid-Year 2025) offers evidence that helps settle the question. Let’s explore.
What Are Index Funds?
Index funds are mutual funds (or ETFs) that track a market index—say, the Nifty 50 or Sensex. Instead of relying on a fund manager’s stock-picking ability, index funds aim to replicate the market’s performance.
The trade-off is simple:
- No chance of outperformance (you’ll get what the index delivers).
- Low fees and consistency (no fund manager risk, no style drift).
Over time, these characteristics make index funds powerful compounding tools for investors.
The Case for Index Funds: Evidence from SPIVA India 2025
The S&P Indices Versus Active (SPIVA) India Scorecard is the gold standard for comparing active funds against benchmarks. The mid-year 2025 edition once again highlights a familiar pattern: most active funds underperform their benchmarks over longer horizons.
Large-Cap Funds
- In H1 2025, 65.6% of large-cap funds underperformed the S&P India LargeMidCap index.
- Over 5 years, underperformance rose to 89.7%.
- Even across 10 years, nearly three out of four funds failed to beat the benchmark.
Tax-Saving (ELSS) Funds
- In H1 2025, 76.9% of ELSS funds underperformed.
- Across 10 years, the number rose to 86.8%
Mid- and Small-Cap Funds
- Short-term results were better, with a majority of funds beating benchmarks in H1 2025.
- But consistency faded over time: 80% underperformed over 3 years, and 81.7% over 10 years
Bond Funds
- 72% of government bond funds and 58% of composite bond funds underperformed in H1 2025.
- Over 10 years, more than 80% of bond funds lagged their benchmarks
Survivorship Bias: The Silent Risk
One of SPIVA’s most important insights is survivorship. Poorly performing funds often get shut down or merged, yet investors who held them suffered the losses.
- Over 10 years, 30% of Indian funds disappeared across categories
✅ For investors, this means the “average” returns quoted by the industry can be misleading—because those averages usually reflect only the survivors, not the full set of funds that existed at the start. In reality, the poor performers that were closed or merged dragged down actual investor experience, but they’re often excluded from simple averages. SPIVA corrects for this by including both surviving and non-surviving funds, giving a more realistic picture of investor outcomes
Why Index Funds Deserve a Place in Your Portfolio
- Cost Advantage – Expense ratios of index funds (0.1–0.3%) are far lower than active funds (1.5–2%). Over decades, that cost difference compounds into huge savings.💡
- Consistency – Active managers may beat the market occasionally, but very few sustain it. Index funds guarantee market returns—no worse, no better.
- Diversification – A single Nifty 50 index fund gives you exposure to India’s top companies.
- Global Evidence – In the U.S., over 90% of active funds underperform over 15 years. India is trending the same way.
- Simplicity – Index investing is stress-free: no chasing star managers, no second-guessing allocation shifts.
💡 Example: Suppose you invest ₹10 lakh for 20 years, assuming the market delivers an average return of 12% per year.
- In an active fund with a 1.8% expense ratio, your effective return would be about 10.2%, growing your money to around ₹69.8 lakh.
- In an index fund with a 0.2% expense ratio, your effective return would be about 11.8%, growing your money to around ₹93.1 lakh.
That’s a difference of more than ₹23 lakh—earned (or lost) purely because of costs.
Where Active Funds Still Matter
Index funds are powerful, but active funds shouldn’t be dismissed entirely. Here’s why they can still play a role:
- Potential for Outperformance – A minority of skilled fund managers do beat benchmarks over the long term. This can occur across categories—large-cap, multi-cap, or thematic strategies. Identifying them is difficult, but not impossible.
- Flexibility and Adaptability – Active managers can adjust portfolios, overweight promising sectors, or reduce exposure to overheated stocks—something index funds can’t do.
- Specialized Strategies – Active funds can provide access to unique themes (green energy, digital India, healthcare) or blended strategies like multi-cap and hybrid funds.
- Consistency Matters – The real challenge is finding managers who outperform consistently, not just for a year or two. Investors should regularly review their holdings and shift away from funds that fail to sustain long-term results.
✅ Think of index funds as your foundation and active funds as supporting blocks—together they provide both stability and growth potential.
Final Verdict
The SPIVA India 2025 Scorecard reinforces what long-term investors know: most active funds fail to beat the market consistently. That makes index funds the natural choice for the core of any portfolio.
But active funds aren’t obsolete. A select few deliver superior long-term returns, and they can complement index funds when chosen wisely. The critical discipline is to review your portfolio regularly, compare fund returns against benchmarks after costs, and reallocate toward long term consistent performers.
✅ The bottom line: Index funds ensure you don’t fall behind the market, while carefully chosen active funds may help you get ahead. Together, they can create a portfolio that balances reliability with opportunity.
Quick Checklist: Reviewing Active Funds in Your Portfolio
- ✅ Compare your fund’s 3-, 5-, and 10-year returns with its benchmark.
- ✅ Check the expense ratio—high costs eat into returns.
- ✅ Review the fund’s consistency across market cycles (bull and bear).
- ✅ Avoid chasing short-term “top performers.” Look for sustained outperformance.
- ✅ Don’t hesitate to exit laggards and reallocate to proven performers or index funds.
- ✅ Be mindful of survivorship bias—don’t just look at today’s surviving funds; remember that many underperformers disappear over time, skewing the industry’s averages.
Here is the link to the S&P Indices Versus Active (SPIVA) Scorecard Mid-year 2025
FAQs
Q. Are index funds better than mutual funds?
Index funds are like mutual funds, but they follow a passive strategy—tracking an index instead of trying to beat it. The advantage is lower costs and transparency, but the trade-off is you’ll never outperform the market. Whether they are “better” depends on your goals: if you want reliable, low-cost growth, index funds usually win.
Q. Do index funds guarantee returns?
No. Index funds don’t guarantee positive returns. What they guarantee is market returns minus minimal costs. If the index falls, so will the fund. Their edge is in eliminating the uncertainty of manager performance and keeping costs low.
Q. Can index funds replace all active funds?
Not necessarily. Index funds work best as the core of your portfolio. Active funds may still be valuable in segments where managers can add value (like multi-cap, small-cap, or thematic strategies). A core-satellite approach—index funds for stability, active funds for selective bets—can be a practical solution.
Q. Are index funds safe?
They carry the same market risk as the index they track.
Q. What is survivorship bias, and why does it matter to investors?
Survivorship bias happens when only the surviving funds are included in performance averages, while funds that closed due to poor performance are ignored. This makes the industry’s average performance look better than what investors actually experienced. As an investor, it’s a reminder to look beyond glossy average returns.
Q. How should I choose an index fund?
Look at:
- The index being tracked (Nifty 50, Sensex, Nifty Next 50, etc.).
- The expense ratio (lower is better).
- The fund’s tracking error—a measure of how closely it mirrors the index.
- The AUM (assets under management)—larger AUM often means better liquidity and efficiency.
Q. How often should I review my active and index fund portfolio?
At least once a year. For active funds, compare performance with benchmarks across 3-, 5-, and 10-year periods. For index funds, check the tracking error and confirm the fund is mirroring the index efficiently. Reallocate if funds are consistently lagging.
Q. Which is better for beginners: index funds or active funds?
For beginners, index funds are usually the safest and simplest entry point. They remove the stress of choosing “the right” manager and let you capture market growth with minimal cost and effort. Once you’re comfortable, you can selectively add active funds to your portfolio.
Q. Can I use index funds for retirement planning?
Yes. In fact, index funds are excellent for long-term compounding. They can form the backbone of your retirement portfolio when combined with debt index funds or bond ETFs for stability. Over decades, the cost savings and consistency become very powerful.