Should we give more time for active mid and small cap MFs to beat the index?

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: October 4, 2025 at 6:00 am

In response to our recent articles on the performance of active mid-cap and small-cap funds versus the Nifty Midcap 150*, a viewer on YouTube suggested that 5-year rolling returns are insufficient to judge these funds, as they are typically recommended for longer periods. We should look at longer periods.

These are the articles:

I disagree with this notion. Of course, one should not invest in equity for only 5Y, but that is not the point here. If an active fund struggles over 5Y, why should I pay extra fees in the hope that it will outperform over longer durations? I shall be happy with an index fund.

Anyway, for what it is worth, this is the data over longer periods. However, be warned that the data has several issues (1) direct plans did not exist before 2013, (2) many active funds changed strategy over time, sometime multiple times, (3) we have mid cap 150 data only from April 2005.

Reward measure: Rolling returns outperformance consistency.

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Rolling returns are a straightforward measure of how consistently a fund has outperformed its benchmark. Take, for example, the Nippon India Small Cap Fund vs Nifty Midcap 150 (graph below) between January 1, 2013, and Sep 12, 2025. There are 1891 5-year rolling returns. If the returns for each of these durations are plotted for the fund and the index together, we will get a graph like this.

5-year rolling returns comparison of Nippon India Small Cap Fund - Direct Plan Growth Plan and Nifty Midcap 150 TRI
5-year rolling returns comparison of Nippon India Small Cap Fund – Direct Plan Growth Plan and Nifty Midcap 150 TRI

The fund has outperformed the index 1891 out of 1891 times. Thus, the rolling return outperformance consistency over seven years is 100%, indicating excellent performance. A consistent performer should beat the index at least 60% to 70% of the time. So, the higher the rolling return outperformance consistency, the better.

For the high fees the AMCs charge, we expect a performance consistency of 70%. If they fail, then they do not deserve such high fees. We are better off with an index fund.

Active Small Cap Funds vs Nifty Midcap 150 TRI

Many of these funds have a mixed history – some started as mid- and small-cap funds, while others began as closed funds, etc. Quant Small Cap was a debt fund! So it is not part of this analysis.

Direct plans (limited data, as they were introduced only on January 1st, 2013).

  • Over 7 years, only 7 out of 14 funds qualified (rolling return outperformance consistency of 70% or more)
  • Over 10 years, 6 out of 9 funds qualified; however, among these six, three were new and had fewer than 500 data points. The oldest fund has only 650 data points.

Regular plans (do not expect stellar performance, as the high commissions will eat away at returns)

  • Over 7 years, only 2 out of 9 funds qualified (rolling return outperformance consistency of 70% or more)
  • Over 10 years, 4 out 9 qualified.

Active Mid Cap Funds vs Nifty Midcap 150 TRI

Direct plans

  • Over 7 years, only 7 out of 20 funds qualified (rolling return outperformance consistency of 70% or more)
  • Over 10 years, 4 out 12 qualified.

Regular plans

  • Over 7 years, only 2out of 16 funds qualified (rolling return outperformance consistency of 70% or more)
  • Over 10 years, only 2 out 14 qualified.

Should we give more time for active mid- and small-cap MFs to beat the index? Absolutely not!

The rolling returns data over a longer duration affirms our earlier recommendations. There is little point in buying active small-cap and mid-cap funds.

We suggest four choices.

  1. Consider sticking to a simple Nifty 50, Sensex 30, or even a Nifty 100 index fund.
  2. If you want “some” mid cap exposure, use a Nifty Next 50 index fund with the right expectations – Nifty vs Nifty Next 50 vs Nifty Midcap 150 vs Nifty Smallcap 250: Return Comparison Sep 2025
  3. If you want whole market coverage, consider a Nifty 500 index fund, but with the right expectations – Nifty 50 or Nifty 500, which index fund should I choose? This will have some small cap exposure and satisfy FOMO better!
  4. If you want more concentrated mid cap exposure, consider the Nifty Large Midcap 250 – but again, understand the risks. See: Can I invest in a Nifty LargeMidcap 250 Index Fund?

Regardless of your choice, never assume yours is superior. Always expect periods of underperformance, during which your patience and conviction will be heavily tested. That is the price you need to pay for building wealth via equities.