Is it time to invest in passive mid-cap funds?

Summary: A decade ago, active mid-cap funds won 68 per cent of the time. Now it’s just 26 per cent. Dive into the data behind this dramatic reversal, the structural changes hurting fund returns and whether passive mid caps are the smarter bet going forward. If an investor had asked a decade ago whether to invest in mid caps through a passive route, the answer would have been a firm no. In the years following the global financial crisis, actively managed mid-cap funds consistently beat their benchmark, maintaining an edge of around four to five percentage points. Ask the same question today, and the answer is no longer clear-cut. Some would argue yes, others would hesitate. What has changed in this time? The answer lies in the graph titled ‘Alpha fades away’, which shows how the average performance of mid-cap funds has shifted against their benchmark, the Nifty Midcap 150 TRI. While the early weakness could be explained by the side-effects of 2008, the long-term pattern tells a different story—a steady erosion of alpha. Over the years, the category’s outperformance of roughly 4 per cent has turned into an underperformance of similar magnitude. When alpha changes sides For several years, fund managers operated in an environment without rigid definitions for large, mid and small-cap categories. This allowed them a degree of flexibility in portfolio construction. A mid-cap fund could ho

This article was originally published on November 20, 2025.