Investors should make the most of both categories based on their risk-return profiles

The outperformance of equity markets since March 2020 has swung the spotlight on the relative underperformance of active funds even as the buzz around passive funds grows louder.

It would, however, be myopic to countenance a long-term view in favour of either category based on this alone.

Indeed, there are multiple layers to the underperformance of active funds, a CRISIL analysis shows.

Underperformance of active funds a reality, but there is more to it

Among actively managed equity funds, it is the large-cap funds category that has fallen behind the most, especially since 2018 when recategorisation of schemes was effected.

The recategorisation has limited the investments of large-cap funds in lower-capitalisation stocks to less than 20% of the portfolio. Skewed positive performance of some major companies and the inability of the large-cap funds to replicate the index weights of such companies due to exposure limits could also be impacting their performance.

Mid-cap funds, too, have seen a dip in alpha in recent times.