Active vs Passive Funds in India: Is SPIVA India Giving You the Full Picture?

“Most active funds underperform the index.”

You’ve probably heard this statement countless times.

It’s repeated in blogs, presentations, and client meetings as if it’s an unquestionable truth.

But pause for a moment and ask yourself:

Underperform which index? And is that comparison even fair?

Because the real debate is not just active vs passive.

It’s whether the data used to support that debate is accurate, relevant, and comparable.

Table of Contents:

1. What Is the SPIVA India Scorecard?
2. Why SPIVA Became the Default Argument Against Active Funds
3. SEBI’s Fund Categorisation: The Foundation Most People Ignore
4. The 2024 Benchmark Shift: What Changed and Why It Matters
5. The Core Problem: Are These Benchmarks Even Comparable?
6. Four Critical Flaws in SPIVA India Data
7. The Investability Problem: Can You Even Use These Benchmarks?
8. What Should Be the Right Benchmark Instead?
9. Does This Mean Active Funds Are Actually Better?
10. Active vs Passive in a Growing Economy Like India
11. A Smarter Way to Evaluate Funds
12. Final Thoughts

1. What Is the SPIVA India Scorecard?

The SPIVA (S&P Indices Versus Active) India Scorecard is one of the most widely cited reports in the investment world.

It tracks:

• Large-cap funds
• Mid- and small-cap funds
• ELSS funds

And measures:

What percentage of these funds fail to beat a benchmark index over time?

One important strength:

✔️ It adjusts for survivorship bias (includes closed and merged funds)

So yes, it’s methodologically sound in some areas.

But here’s the bigger question:

Is it comparing apples to apples?

2. Why SPIVA Became the Default Argument Against Active Funds

The appeal is simple.

SPIVA provides a clean headline:

• “80% of funds underperformed”
• “90% failed over 10 years”

Easy to understand. Easy to quote. Easy to believe.

But investing isn’t that simple.

Because behind every percentage lies:

• A benchmark choice
• A category definition
• A methodology

And if even one of these is misaligned, the conclusion can be misleading.

3. SEBI’s Fund Categorisation: The Foundation Most People Ignore

Before evaluating any performance, we need to understand what funds are actually allowed to do.

SEBI defines:

• Large-cap funds → Top 100 companies
• Mid-cap funds → 101–250 companies
• Small-cap funds → 251+ companies

And mandates strict allocation rules.

So logically, shouldn’t performance be measured against benchmarks that reflect these exact universes?

That’s where things start to break down.

4. The 2024 Benchmark Shift: What Changed and Why It Matters

In 2024, a structural change happened.

S&P exited its joint venture with BSE.

As a result:

👉 SPIVA stopped using BSE indices

👉 It switched to its own S&P India index family

This wasn’t purely a methodological upgrade—it was a business-driven shift.

And that shift changed the nature of comparisons.

5. The Core Problem: Are These Benchmarks Even Comparable?

Let’s simplify this.

Earlier (Pre-2024):

• Large-cap funds → Compared to top 100 companies
• ✔ Reasonably aligned

Now (Post-2024):

• Large-cap funds → Compared to top 200 companies
• That includes mid-caps.

But here’s the issue:

A large-cap fund manager:

• Is restricted to top 100 stocks

The benchmark:

• Includes an additional 100 mid-cap stocks

So the benchmark has access to higher-growth segments the fund cannot fully invest in.

Is that a fair comparison?

6. Four Critical Flaws in SPIVA India Data

🔴 i. Large-Cap Vs Large + Mid-Cap Benchmark

This is the biggest distortion.

Mid-cap stocks:

• Typically deliver higher returns
• Carry higher risk

By including them in the benchmark:

The bar is artificially raised

Result:

Active large-cap funds appear to underperform more than they actually do.

🔴 ii. Mid + Small Funds Vs Pure Small-Cap Benchmark

Mid-cap funds are:

• Compared against small-cap indices

But these are completely different segments.

👉 Different risk

👉 Different volatility

👉 Different return cycles

This mismatch again distorts results.

🔴 iii. Broken 10-Year Comparisons

Here’s something most people miss:

• Old years → Measured using BSE indices
• Recent years → Measured using S&P India indices

Then combined into a single 10-year number.

👉 That’s not a continuous comparison

👉 It’s a stitched dataset

Which reduces reliability of long-term conclusions.

🔴 iv. Benchmarks You Can’t Invest In

This is the most practical issue.

Ask yourself:

Can you invest in the S&P India LargeMidCap Index?

No.

But you can invest in:

• Nifty 50
• Nifty 100
• Nifty Midcap 150
• BSE 500

So if the benchmark isn’t investable:

How useful is the comparison?

7. The Investability Problem: Can You Even Use These Benchmarks?

At the heart of the passive investing argument lies a simple idea:

“If active funds underperform the index, just invest in the index.”

Clean. Logical. Efficient.

But here’s the uncomfortable question:

What if the index itself is not something you can actually invest in?

Because that’s exactly where the problem begins.

An index is only useful to you as an investor if:

• There are low-cost funds tracking it
• It is accessible through mutual funds or ETFs
• You can realistically replicate its returns

If none of this is true, then the comparison becomes purely academic.

In other words:

You’re being told active funds underperform something you cannot even buy.

That creates a disconnect between theory and execution.

And in investing, execution is everything.

Think about it this way:

If a benchmark shows 12% returns, but the closest available fund tracking it delivers 10.5% after costs and tracking error, then your real benchmark is not 12%—it’s 10.5%.

So when evaluating active vs passive:

The real comparison should be

Active fund vs investable passive alternative—not a theoretical index

Because ultimately, your portfolio doesn’t live in reports—it lives in real markets.

8. What Should Be the Right Benchmark Instead?

If we shift from theory to practicality, the answer becomes clearer.

A good benchmark should do three things:

1. Reflect the actual investment universe
2. Align with regulatory definitions (SEBI categories)
3. Be easily investable

When you apply these filters, a more realistic framework emerges:

Category	Better Benchmark
Large-cap	Nifty 100 TRI
Mid-cap	Nifty Midcap 150 TRI
Small-cap	Nifty Smallcap 250 TRI
ELSS	Nifty 500 TRI

Why does this matter so much?

Because these indices:

• Directly map to where funds are actually investing
• Are tracked by multiple AMCs
• Allow investors to take actionable decisions

This shifts the conversation from:

“What does the data say?”

To:

“What can I actually do with this data?”

And that’s a far more useful question.

9. Does This Mean Active Funds Are Actually Better?

Let’s address this head-on.

No—this does not automatically mean active funds are superior.

There are still very real challenges:

• Higher expense ratios eat into returns
• Consistency is difficult to maintain
• Many funds still fail to outperform over long periods

But here’s where nuance becomes important:

If the benchmark itself is inflated or mismatched, then the extent of underperformance can be exaggerated

And that changes the narrative.

Instead of saying:

“Most active funds fail badly”

A more accurate statement might be:

“Many active funds struggle to outperform—but the gap may not be as wide as reported”

That distinction matters—especially when making long-term allocation decisions.

Because investing is not about proving a point.

It’s about optimizing outcomes.

10. Active vs Passive in a Growing Economy Like India

Now let’s zoom out.

India is not a static, fully efficient market like some developed economies.

It is:

• Rapidly evolving
• Sectorally diverse
• Continuously adding new companies and themes

In such an environment, inefficiencies naturally exist.

And where inefficiencies exist:

Active management has room to add value

For example:

• Identifying emerging sectors early
• Allocating to under-researched mid and small caps
• Avoiding overvalued segments

Passive funds, by design:

• Follow the market
• Mirror existing allocations
• Cannot differentiate between overvalued and undervalued stocks

So while passive investing offers:

• Simplicity
• Cost efficiency
• Predictability

Active investing offers:

• Flexibility
• Selective positioning
• Potential for higher alpha in a growing market

The trade-off becomes philosophical:

Do you prefer guaranteed market returns—or the possibility of beating them?

There is no universal answer—only what fits your strategy.

11. A Smarter Way to Evaluate Funds

Instead of relying solely on headline reports, a more robust approach would involve:

✔️ Looking at rolling returns (3–5 years)

This avoids the bias of picking convenient start and end dates.

✔️ Comparing against correct benchmarks

A large-cap fund should be judged against a large-cap index—not a blended one.

✔️ Factoring in costs explicitly

Returns after expenses are what matter—not gross performance.

✔️ Evaluating consistency

One year of outperformance is noise.

Repeated outperformance across cycles is signal.

✔️ Separating categories clearly

Mid-cap and small-cap behave very differently.

Combining them hides important insights.

When you approach fund evaluation this way, something interesting happens:

The conversation shifts from “active vs passive”

to
“which strategy works best in which segment?”

And that’s a far more sophisticated way to invest.

12. Final Thoughts

The SPIVA India Scorecard remains a valuable reference—but it should not be treated as the final word.

Especially post-2024, where:

• Benchmarks have shifted
• Comparisons have become less aligned
• Practical applicability has reduced

So the next time you hear:

“80% of active funds underperform”

Pause and ask:

• Compared to what?
• Is that comparison fair?
• Can I replicate that benchmark?

Because better questions lead to better investment decisions.

And while passive investing continues to be a strong foundation, a thoughtfully selected set of active funds—especially in a dynamic, growing economy like India—can still play a meaningful role in enhancing long-term returns.

If navigating this balance feels complex, working with a Certified Financial Planner (CFP) can help you build a strategy that is not just data-driven—but context-aware.