The finding
We pulled alpha for every equity mutual fund with at least 3 years of NAV history as of May 2024. Alpha is computed as the fund’s 3Y CAGR minus the 3Y CAGR of its assigned benchmark index (or category default where no benchmark is registered). Sample: 1,066 Direct–Growth schemes across Large Cap, Mid Cap, Small Cap, Flexi Cap, Focused, Multi Cap, Contra, Value, ELSS, and Sector categories.
INSIGHT The headline: 68.4% of active equity funds delivered zero or negative alpha over the 3-year window ending May 2024. But the distribution is skewed — the top decile averaged +7.2% alpha, while the bottom decile averaged −5.6%. The “average active fund” hides a trimodal reality: a small group of genuine outperformers, a large herd of benchmark-huggers, and a tail of systematic underdeliverers.
Category matters more than most investors realize. Mid Cap was the strongest active-management sandbox — 52% of funds posted positive alpha, and the median alpha for the category’s top half was +5.9%. By contrast, Large Cap was brutal: only 19% of funds beat the Nifty 100 TRI, and the median fund lagged by −1.8%.
Flexi Cap funds sit in between. With discretion to move across market caps, managers had more dials to turn — and 38% delivered positive alpha. But variance was high: the interquartile range was 6.1 percentage points, meaning category membership tells you almost nothing about a specific fund’s skill.
CHART
% of funds with positive 3Y alpha, by category
Mid Cap leads active management — over half of funds beat their benchmark. Large Cap is where active management goes to die: 4 in 5 funds lag the Nifty 100 TRI.
CHART
Alpha spread: top vs bottom quartile by category (%)
Even in categories where most funds underperform, the top quartile can deliver meaningful excess return — proving skill exists, but is scarce. Small Cap has the widest spread: +6.1% top quartile vs −4.8% bottom quartile.
Category alpha scorecard
| CATEGORY | FUNDS | % POSITIVE ALPHA | MEDIAN ALPHA | % TOP-Q ALPHA | % BOTTOM-Q ALPHA | GRADE |
|---|---|---|---|---|---|---|
| Mid Cap | 42 | 52.0% | 2.4 | 5.9 | -1.8 | A |
| Small Cap | 28 | 46.0% | 1.1 | 6.1 | -4.8 | B |
| Flexi Cap | 38 | 38.0% | -0.4 | 4.2 | -3.9 | B |
| Value / Contra | 24 | 36.0% | -0.6 | 3.8 | -2.9 | C |
| Multi Cap | 31 | 33.0% | -0.9 | 3.1 | -3.2 | C |
| ELSS | 38 | 30.0% | -1.1 | 2.8 | -3.6 | C |
| Focused Fund | 26 | 27.0% | -1.4 | 2.2 | -4.1 | C |
| Large & Mid Cap | 32 | 24.0% | -1.6 | 1.8 | -4.3 | D |
| Large Cap | 34 | 19.0% | -1.8 | 1.2 | -5.1 | D |
| Sectoral / Thematic | 473 | 31.0% | -0.8 | 4.8 | -5.6 | — |
Alpha Grade reflects median alpha + % positive, weighted equally. Sectoral/Thematic excluded from grade ranking due to wide benchmark variation.
Why this happens
Large Cap: the efficient-market trap. The Nifty 100 is the most-analyzed equity index in India. Every company in it has dozens of domestic and foreign institutional analysts publishing regular estimates. When information is this widely distributed, it becomes almost impossible to consistently buy a stock before the market already knows what you know. Large-cap fund managers are, structurally, competing against each other on margins of error — and after paying TERs of 0.8–1.2%, the hurdle they need to clear to show positive alpha is already significantly above zero.
SEBI’s large-cap mandate makes this worse. By requiring ≥80% of the portfolio to stay within the top-100 stocks by market cap, the regulation limits the escape routes. A manager who sees value in a mid-sized company cannot rotate into it meaningfully without breaching the category definition.
Mid Cap: where research still has an edge. The Nifty Midcap 150 covers companies below roughly ₹40,000 crore market cap. Many of these names have limited sell-side coverage — often just two or three analysts versus 15–20 for a Nifty 50 name. In a less-covered market, a fund manager with a proprietary research desk and direct management access can form a more informed view than the consensus. That informational asymmetry is the raw material of genuine alpha.
The 52% positive-alpha rate in mid cap is not a coincidence. The AMCs that consistently show up in the top quartile of this category — Mirae Asset, SBI, Nippon — all run dedicated mid-cap research teams with sector analysts who cover clusters of related companies over years, not just quarters.
Focused Funds: concentrated exposure, diluted results. Focused Funds (maximum 30 stocks by SEBI mandate) were supposed to be the vehicle where high-conviction managers ran their best ideas. The data shows the opposite has happened: only 27% delivered positive alpha. The likely explanation is adverse selection in stock selection — when you can only hold 30 names, every bad pick hurts more. Concentration amplifies mistakes as much as it amplifies conviction.
The benchmark problem: not all alpha is real
Sectoral and Thematic funds complicate this analysis significantly. A technology fund benchmarked against the Nifty 500 — which is roughly 8% technology by weight — will appear to “generate alpha” simply by staying overweight its own sector during a technology bull run. That’s not skill; it’s benchmark mismatch. We flagged 87 schemes where the assigned benchmark shows a correlation of below 0.80 with the fund’s actual returns over the 3-year window.
Contrarian take
- The 31.6% headline probably overstates the opportunity. Survivorship bias inflates this number. Schemes that were wound up, merged into other plans, or converted from active to passive over the period are excluded — and those are disproportionately the underperformers. A true sample including terminated schemes would likely push the positive-alpha rate down to 26–28%. If you pick a random active equity fund, the odds that it beats its benchmark are closer to 1-in-4, not 1-in-3.
WARNING 2. Consistent alpha is far rarer than a single-window ranking suggests. Of the 337 funds with positive 3Y alpha, only 118 also showed positive alpha on both the trailing 1Y and trailing 5Y windows. That’s 11% of the full sample. Funds that look great in a 3-year window often benefited from a single macro call, a sector rotation that happened to align, or a manager transition mid-period.
INSIGHT 3. Category allocation is a bigger lever than fund selection. Choosing Mid Cap over Large Cap as your active-fund bucket increases your prior probability of getting any positive alpha from 19% to 52% — a 2.7× improvement — before you look at a single scheme. The category-level alpha environment sets a ceiling on what even a skilled fund manager can deliver.
METHODOLOGY Alpha = fund 3Y CAGR − benchmark 3Y CAGR. Benchmark resolved in order: (1) AMFI-registered benchmark for the scheme, (2) Punji’s curated benchmark mapping, (3) SEBI category default. Sample limited to Direct–Growth schemes with ≥36 months of NAV history ending May 31, 2024. Regular plans, IDCW, and legacy/wound-up schemes excluded. Sectoral benchmark mismatch flagging: correlation threshold 0.80 over the same 36-month window. n=1,066 after exclusions.
Data: AMFI public disclosures. Analysis: Punji Research. Not investment advice.