Are active large-cap funds back in the game?

Summary: Index funds have become the default choice for many investors. But with active large-cap funds staging a comeback since 2023, is it time to rethink the active-passive debate?

This past year has been a test of people’s faith. And one place where discouraged investors are flocking to is Reddit.

Many Redditors are posting their portfolios for all the world to see. Holdings, portfolio value and finally XIRR – the key metric all of them are worried about.

So, while scrolling Reddit, I came across a good portfolio.

And one fund pick struck me in particular. The person had a decent allocation in an active large-cap fund.

This forced me to revisit the active-passive debate.

Falling out of favour

For context, 2017 to 2022 were the dark ages for active large-cap funds. In fact, when this slump started, we noticed that many were replicating the index. 

Our analysis suggested that the investment pool for large caps was limited. After all, there’s a huge entry barrier for becoming a large-cap. This meant that fund managers were left with little wiggle room.

This makes it harder to spot discounts – the key growth driver. Unlike in mid-cap and small-cap funds, where the investible universe is tremendous, large caps are well-understood.

Fund managers across different portfolios have to work with the same few names trading at fair valuations. There are exceptions, however. For instance, in early 2020, HDFC Bank was
trading at valuations that had not been seen since the early 2000s. It was a steal, and that rarely happens.

Many people misconstrue this as a lack of active stockpicking.

Add to that, people grew sceptical of the hefty expense ratio, with the average for the fund category being on the higher side. Compare that to any passive fund on the market.

The final nail in the coffin was 2018, when only one fund beat the benchmark. The case for passive investing became stronger.

Suggested read: COVID, war and things like that

Understanding US markets

Many a passive purist will say – Look at the US market.

And they are right. Over the last 15 years, 88.29 per cent of active funds failed to beat the S&P 500 (data as of June 30, 2025). In fact, in 2008 – Warren Buffett issued an open challenge to hedge fund managers.

Beat an S&P 500 index fund over a period of 10 years.

And here’s the catch.

You have to subtract your fees, costs, and expenses.

Now, why is this so challenging?

The US is a developed economy, and its carefully monitored indices leave little room for mispricings. This case is strengthened when you take into account the hefty fees of fund managers.

So, can you guess who won?

Well, at first, it seemed like Mr Buffett was losing. But after 4 years, he began dominating the race.

Again, for little outperformance, the high expense ratio isn’t justified. At least, that’s what the Oracle of Omaha thinks so.

But does this logic hold true for Indian markets?

Making a recovery

Every active fund has a period of cyclicality. In essence, it leads to periods of underperformance that can be nerve-wracking for any novice.

However, in 2023, the tides had begun turning. A whopping 26 out of 28 had won the race. Since then, the recovery run began.

Today, 19 out of 27 schemes are beating the benchmark. In fact, among them, Canara Robeco Large Cap Fund had the highest returns and was the most consistent outperformer.

So, does it still make sense to have a passive fund?

The pursuit of returns

The Redditor I mentioned earlier had a handsome investment in the Nippon Large Cap Fund. The fund has beaten the category comfortably for the last five years. And it is well ahead of index funds.

This conversation was a wake-up call for me. But not for the reason you might think.

ConclusionThe Redditor I mentioned earlier had a handsome investment in the Nippon Large Cap Fund. The fund has beaten the category comfortably for the last five years. And it is well ahead of index funds.

Many new investors are chasing returns. However, very few stop to think about their risk appetite and the nature of their own financial goals. Ironically, the seasoned veterans who know their way around the market take a more laid-back approach to wealth-building.

Coming back to the topic of Reddit, I came across so many people with a self-declared “Moderate” risk profile but having only equity investments. You can’t expect to make good returns through equity if your stomach churns at the slightest bit of volatility.

Similarly, if you invest in an active large-cap fund, you have to be comfortable with periods of underperformance. Those times will test you. And if you find that cyclicality uncomfortable, you are better off with an index fund. 

Morgan Housel, the author of The Psychology of Money, often champions index funds for this very reason. Most people cannot handle those periods of uncertainty. And it leads them to make even more foolish decisions.

The goal is to make a system through which you can reduce your error rate. Not to outperform the market.

How to build lasting wealth

Betting on yesterday’s winners isn’t enough. After all, their best days are far behind them.

Instead, you need to spot future compounders. So how do you do that?

That’s where it gets tricky because you want a fund with a proven track record. But it should also be able to replicate that performance in the long run.

To strike this balance with ease, consider Value Research Fund Advisor.

Taking the active route becomes easier with our help. Custom fund recommendations across different categories, allow you to achieve your ambitious financial goals. Direct plan investing right from the platform, helps you avoid paying needless commissions.

Try out Fund Advisor!

Also read: The index fund problem