Go active or be passive? Let the numbers decide

Summary: Should you fully go active or passive? Or have a balance of both? There’s no clear answer. Here, we look at which mutual fund categories favour active management versus those where passive investing works better. What should be the ideal ratio between active and passive funds? Within equity, what should be the ratio between large-cap and mid-cap funds? Does a flexi-cap fund alone suffice? Is there a flexi-cap index fund? – Jayasheela The ‘active vs passive’ debate is akin to the ‘chicken or the egg’ dilemma. There’s no clear answer.  However, unlike the latter, the confusion between active and passive has less to do with philosophy and more to do with economics. While both approaches have their strengths and drawbacks, each category fares differently across mutual fund categories. But what is more important is whether the fee paid for active management can meaningfully translate to outperformance, after costs are deducted. Why? Because gross outperformance alone can be misleading. A fund that beats its benchmark by 1 per cent may look successful on paper. But if it charges an expense ratio of 0.88 per cent while an index fund charges 0.23 per cent and delivers nearly similar returns, the net advantage shrinks dramatically. Over time, that cost gap compounds quietly and persistently. So, the right question is not whether active can outperform. It is whether it can outperform enough to justify its fee. Where does active management hold merit? To find out, we decided to check how often active funds across each category (large, mid and small) outperformed their respective indices. Where active truly earns it

This article was originally published on February 21, 2026.