In recent years, the landscape of actively managed large-cap equity mutual funds has witnessed a striking erosion in alpha generation, with fund managers increasingly struggling to outperform their designated benchmarks. A bl.portfolio analysis reveals a sobering reality: among the 22 active large-cap funds examined, 12 failed to beat their benchmarks 100 per cent of the time when assessed through rolling five-year returns derived from seven years of NAV data. We delve into the underlying dynamics driving this persistent underperformance and explore the strategic recalibrations investors may consider as they navigate this evolving terrain.
Key reasons behind underperformance
SEBI’s recategorisation and restricted universe: In 2018, SEBI mandated that active large-cap funds must invest at least 80 per cent of their portfolio in the top 100 stocks by market capitalisation. This narrowed the investable universe, reducing flexibility for fund managers to scout beyond the obvious names. Consequently, many funds began hugging their benchmarks, limiting their ability to generate alpha.
Mandatory TRI benchmarking: Earlier, funds were compared against price indices, which excluded dividends. The shift to Total Return Index (TRI) benchmarking — which assumes reinvestment of dividends — raised the performance bar. Passive indices now reflect higher returns, making it harder for active funds to beat them consistently.
Higher cost: Expense ratios for active funds have ranged from 1.6–2.6 per cent for regular plans and 0.4–2.4 per cent for direct plans. Over long horizons, this cost differential compounds significantly, further eroding the net returns of active funds.
Missed opportunities: Compliance norms and internal risk frameworks often prevent aggressive sector or stock bets, limiting upside during thematic rallies. The PSU banking rally of 2022–2023 saw the sector index soar nearly 70 per cent, but many large-cap funds held minimal PSU exposure owing to past underperformance and governance concerns, hurting returns. Similarly, Adani group stocks delivered exponential gains in 2021 and 2023, which funds avoided while benchmarks benefited, widening the performance gap.
Nifty Next 50 factor: The Nifty Next 50 — companies ranked 51–100 by market cap — was once a strong alpha source, outperforming the Nifty 50 from 2014–17 with 17–18 per cent CAGR versus 11–12 per cent. Its modest 12–15 per cent weight in Nifty 100 allowed active funds to tactically benefit. But post-2020, valuation excesses, governance issues, sector concentration (including Adani volatility) and high beta hurt performance, while the Nifty 50’s stability drew flows, diluting this alpha lever.
Tactical mid- and small-cap allocation: Beyond the mandated 80 per cent large-cap exposure, funds can tactically allocate to mid- and small-caps. Funds that used this leeway beyond 80 per cent prospered; however, many stayed almost fully invested in large-caps, missing the opportunity.
Nearly half the funds also maintained a conservative approach to portfolio churn — 14 of 33 recorded an average turnover ratio below 50 per cent over the past seven years, limiting responsiveness to market shifts. Cash calls were similarly restrained, averaging 4.7 per cent versus 5.1 per cent for mid-cap and 6.5 per cent for small-cap peers. While cash buffers help cushion drawdowns, their limited use reduced flexibility.
Above all, equity market corrections over the past 7–8 years have been short-lived, creating an unfavourable environment for active managers. Mature businesses often realise their potential during prolonged bear phases — periods when active stock-picking can shine. Without such downturns, the scope to generate alpha has narrowed considerably.
What our study shows
The objective of the study was to determine the percentage of underperformance of funds against their benchmarks. We compiled rolling return performance for the one-, three- and five-year timeframes using seven years of NAV history. These returns were compared with the respective benchmarks (11 funds benchmarked to BSE 100 TRI and 22 to Nifty 100 TRI). We then counted how many times each fund fell short of its benchmark across the rolling periods.
One-year rolling returns: Across 2,193 data points from 24 funds with at least a seven-year track record, underperformance ranged between 27–79 per cent. Funds with the highest underperformance included LIC MF (79 per cent), Axis (76 per cent), Taurus and Union (73 per cent), and PGIM India and UTI (70 per cent). ICICI Pru, Nippon India, Kotak and Invesco India delivered the least underperformance (27–37 per cent).
Three-year rolling returns: Across 1,462 observations, the highest underperformance was seen in PGIM India (100 per cent), Mirae Asset (100 per cent), LIC MF (98 per cent), Union (96 per cent), Groww (92 per cent) and Axis (90 per cent). ICICI Pru, Nippon India and HDFC large-cap funds fared relatively better.
Five-year rolling returns: For 732 observations, 12 funds showed 100 per cent underperformance: Axis, Bandhan, DSP, Groww, HSBC, LIC MF, Mirae Asset, PGIM India, SBI, Taurus, Union and UTI. In contrast, Nippon India and ICICI Pru had no underperformance, while Kotak (14 per cent) and HDFC Large Cap (18 per cent) fared better.
What should you do?
The findings raise a fundamental question: why should investors continue paying higher expense ratios for active large-cap funds when many have persistently lagged their benchmarks, while low-cost passive options reliably deliver market returns? The case for selective pruning is compelling.
Funds that have displayed sustained, broad-based underperformance across one-, three- and five-year rolling periods — including LIC MF, PGIM India, Union, Axis, Mirae Asset, Groww, UTI and Taurus — merit a reassessment. Several of these were once category favourites, but their prolonged inability to beat the index undermines the rationale for staying invested. Investors may consider exiting such schemes and reallocating capital more efficiently.
Conversely, a handful of active large-cap funds — ICICI Pru, Nippon India, Kotak, HDFC and Invesco India — have demonstrated relative resilience, containing their underperformance and displaying better benchmark-capture ratios. Investors wishing to retain active exposure can evaluate these funds, focusing on consistency, portfolio construction and downside control.
For those prioritising simplicity, low costs and predictable index-linked outcomes, passive products such as Nifty 100 and BSE 100 index funds or ETFs offer an attractive alternative. With minimal tracking error and significantly lower fees, passive strategies can serve as a core allocation — particularly in a segment where alpha has structurally diminished.
Published on November 15, 2025