How often should an active fund beat the index?

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: July 27, 2026 at 6:00 am

Last Updated on July 27, 2026 at 6:29 am

This article discusses how often an actively managed mutual fund should beat its chosen or category-representative index.

The answer depends on who you ask. If you ask the investor, they should say, “as often as possible, if not always.” They should say “Should” because although investors pay a high management fee for active management, they often give fund managers a long rope.

If you ask the product manufacturer (the AMC), they would settle for just enough outperformance to keep the AUM inflow intact or, better yet, growing. I once saw an AMC promoter respond on social media, saying that even a 51% outperformance (i.e., anything above 50%) is good enough. Here, 51% means that, over 100 time windows, the active fund beat the index 51 times.

But as a paying customer, is that enough bang for your buck? A 50% or 55% consistency is close to coin-toss probability. That means close to half the measurement windows, the active fund underperforms.

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This (IMO) does not justify their huge fee (regardless of performance*), but the ~50% number is close to reality. See: Watch my talk on active vs passive investing in India.

* I believe that AMCS should charge a performance-dependent fee. If the fund underperforms, the fees collected over a financial year should be refunded, or the fee should be reduced to a much lower level in the next financial year and beyond until outperformance returns.

Since this is unlikely, investors are better off with index funds.

Since January 2020, we have been publishing an equity mutual fund screener to assess performance consistency in three ways.

  • Rolling return outperformance consistency: The fund returns are compared with category benchmark returns for every possible 1-, 2-, 3-, 4-, and 5-year period. The higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns, and the fund has beaten the benchmark 675 times. The consistency score will be 675/876 ~ 77%.
  • Upside performance consistency over every possible 1y, 2y, 3y, 4y, and 5y: The higher, the better. A score of 70% means that 7 out of 10 times, the fund outperformed the category benchmark when the benchmark increased. This is a measure of reward.
  • Downside performance consistency over every possible 1y, 2y, 3y, 4y, and 5y: The higher, the better. A score of 60% means that 6 out of 10 times, the fund outperformed the category benchmark when the benchmark was moving down. This is a measure of risk protection.

While we strongly recommend using index funds (especially for young investors), if you must choose active funds, expect a rolling return outperformance consistency of 60-70%. Less than that does not justify the additional fees.