Active vs. Passive Mutual Funds in India: Decoding the SPIVA Mid-Year 2025 Scorecard

For investors navigating the Indian mutual fund landscape, the debate between active management (where fund managers pick stocks to beat the market) and passive management (where funds simply track an index) is a tale as old as time. S&P Dow Jones Indices has been the de facto scorekeeper of this ongoing active versus passive debate since the first publication of their U.S. Scorecard in 2002[cite: 17].

The recently released SPIVA India Mid-Year 2025 Scorecard offers a fascinating, data-driven look into how Indian active fund managers performed during the first half of 2025[cite: 19, 20]. The scorecard measures the performance of Indian actively managed funds against their respective benchmarks over various time horizons, encompassing both equity and bond funds[cite: 18]. Let’s dive deep into the data to see whether paying higher expense ratios for active management actually paid off this year, and more importantly, what the long-term trends reveal about wealth creation.

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The Big Picture: Market Context in H1 2025

To understand the performance of mutual funds, we first have to understand the playground they were operating in. The first half of 2025 presented contrasting outcomes[cite: 20]. Globally, equities maintained positive momentum, bolstered by moderating inflation and resilient economic growth[cite: 71].

However, within India, it was a market of diverging capitalizations:

• Large Caps Shone: The S&P India Large MidCap index climbed 6.2% in H1 2025[cite: 50, 72]. The broader S&P India BMI also clocked up gains of 5.2%[cite: 72].
• Small Caps Stumbled: Smaller firms were under pressure, with the S&P India SmallCap index slipping by 0.5% during the same six-month period[cite: 57, 73].
• Bonds Rallied: Indian bond markets had a strong start to the year, with the iBoxx ALBI India up 5.0%[cite: 73].

Interestingly, the market experienced notable mean reversion in sector performance[cite: 90]. The winners of 2024 largely underperformed the benchmark in early 2025[cite: 90]. In fact, out of the six sectors that beat the benchmark last year, five trailed it in H1 2025[cite: 90]. Conversely, sectors like Energy, Consumer Staples, and Financials—which lagged in 2024—were strong outperformers, with Energy beating its benchmark by over 12%[cite: 91]. This wide sector dispersion of over 28% between the best-performing Energy sector and the worst-performing Information Technology sector theoretically provided active managers with favorable opportunities to generate alpha via smart sector weightings[cite: 92]. But did they capitalize on it?

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The Equity Battleground: Where Active Managers Struggled (And Where They Won)

1. Indian Equity Large-Cap Funds: The Passive Case Strengthens

In the Large-Cap space, the data paints a tough picture for active managers. Despite the wide sector dispersion that should have allowed skilled stock-pickers to shine, a majority of funds failed to beat their benchmark[cite: 21].

A staggering 65.63% of actively managed Indian Equity Large-Cap funds underperformed the S&P India Large MidCap index in the first six months of 2025[cite: 51, 220]. While active funds gained 5.3% on an equal-weighted basis, the index itself climbed 6.2%[cite: 50]. This suggests that in the highly researched, highly efficient large-cap space, simply buying the index was a superior strategy for most investors.

2. Indian ELSS Funds: High Stakes and High Selection Risk

Equity Linked Savings Schemes (ELSS) are incredibly popular due to their tax-saving benefits. However, finding a winning fund in this category is becoming increasingly difficult. In H1 2025, 76.92% of Indian ELSS funds underperformed the S&P India BMI[cite: 54, 220].

What makes the ELSS category particularly treacherous is the severe "fund selection risk"[cite: 174]. The SPIVA report highlights that the performance gap between top-tier and bottom-tier funds is stark; bottom-quartile ELSS funds underperformed their top-quartile peers by a notable 4%[cite: 174]. For investors locking their money in for three years, picking the wrong active ELSS fund can severely impact overall portfolio returns.

3. Indian Equity Mid-/Small-Cap Funds: The Lone Bright Spot

Here is where the narrative flips. Indian Equity Mid-/Small-Cap funds were the only category in the report where the majority of funds outperformed the relevant benchmark[cite: 132]. Only 34.48% of these funds underperformed the S&P India SmallCap index, meaning roughly 65% of active managers successfully beat the benchmark[cite: 58, 220].

Why did active managers succeed here? The SPIVA report points to a structural quirk rather than pure stock-picking genius within the small-cap space. Because the S&P India SmallCap slipped by 0.5% while large-cap stocks rallied, active small/mid-cap fund managers who held a tilt toward larger-capitalization "blue chip" stocks benefited immensely[cite: 57, 133]. Historically, there is a strongly positive relationship between the outperformance of large caps over small caps and the success rate of active mid/small-cap managers[cite: 135, 136]. By drifting slightly out of their core mandate into larger, safer stocks, these managers protected their portfolios from the small-cap dip.

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The Debt Market: Fixed Income Fails to Flex

If you thought the struggles of active management were confined to equity markets, the fixed-income data offers a sobering reality check. Bond funds, often sought for stability, showed massive underperformance.

• Indian Government Bond Funds: The iBoxx ALBI India index increased by 5.0% in H1 2025[cite: 60]. Yet, slightly more than one-quarter of active managers beat the benchmark, resulting in a 72.00% underperformance rate[cite: 60, 220].
• Indian Composite Bond Funds: These funds, which mix government and corporate debt, didn't fare much better. They posted an underperformance rate of 58.27% in the first half of the year[cite: 63, 220].

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The Long Game: Why Time is the Enemy of Active Management

While a six-month snapshot is interesting, mutual fund investments are meant for the long haul. The SPIVA Scorecard truly shines when analyzing 3-year, 5-year, and 10-year horizons. The data proves unequivocally that active management's success rate deteriorates drastically as the timeline extends.

Let's look at the percentage of funds outperformed by the index over a 10-year horizon[cite: 220]:

• Indian Equity Large-Cap: 73.27% underperformed[cite: 52, 220].
• Indian ELSS: 86.84% underperformed[cite: 55, 220].
• Indian Equity Mid-/Small-Cap: 81.67% underperformed[cite: 58, 220].
• Indian Composite Bond: 97.20% underperformed[cite: 63, 220].
• Indian Government Bond: 82.35% underperformed[cite: 61, 220].

Over a decade, an investor who blindly bought a low-cost index fund would have beaten roughly 8 out of 10 highly-paid active fund managers across almost all equity and debt categories.

Beware of Survivorship Bias

One of the most critical elements of the SPIVA methodology is its correction for survivorship bias[cite: 206, 208]. Many poorly performing funds are quietly liquidated or merged into other funds by asset management companies to hide bad track records[cite: 323, 324]. If you only look at the funds that survive to the end of a 10-year period, active management looks better than it actually is[cite: 325].

The Mid-Year 2025 data reveals a shocking attrition rate. While no funds were liquidated in the six-month period ending June 30, 2025, the 10-year data is brutal[cite: 65]. Over the 10-year period, a weighted average of 30% of funds disappeared across all categories[cite: 65]. Fixed income was particularly devastating, with 55% of Indian Government Bond funds being merged or liquidated over the past decade[cite: 65]. When you invest in an active fund, you aren't just betting that the manager will beat the market; you are also betting that the fund will even exist in ten years.

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The Final Verdict for Investors

The SPIVA India Mid-Year 2025 Scorecard provides invaluable empirical evidence for constructing a robust portfolio. Here are the core takeaways:

1. Core Large-Cap Should Be Passive: With roughly two-thirds of large-cap active managers failing to beat the index in the short term, and nearly three-quarters failing over a decade, simple, low-cost Nifty 50 or Sensex index funds should likely form the core of your equity portfolio.
2. Tread Carefully with ELSS: The massive 86% underperformance over 10 years in the ELSS category means tax-saving shouldn't come at the cost of wealth destruction. If you use active ELSS, you must monitor it rigorously due to the high fund selection risk.
3. Mid and Small Caps Offer Active Alpha (For Now): The mid/small-cap category remains the only viable hunting ground for active managers, but remember that their recent success was heavily driven by a structural tilt toward large caps during a small-cap downturn. Over a 10-year period, even these managers largely fail to beat the index.
4. Keep Debt Boring and Passive: With staggering 10-year underperformance rates of 97% in composite bonds and massive survivorship risks, active debt management appears to be a losing game.

"Experience the active vs. passive debate on a global scale."[cite: 13, 14]. The data from India reflects a global reality: consistently beating the market is incredibly difficult, and for the everyday investor, keeping costs low and tracking the index is mathematically the most probable path to long-term wealth.