Data collated by DSP Mutual Fund shows that, on average, just 34% of actively managed mid-cap funds have outperformed the benchmark index — Nifty Midcap 150 TRI (total return index) over the last six years.
A five-year rolling return analysis (rolled daily from 1 April 2010 to 31 October 2025) reveals a clear trend: since 2018, both the magnitude of alpha and the proportion of outperformers have steadily declined.
This raises an important question: should investors now consider low-cost passive funds that simply track the index, or do actively managed funds still have a role in the mid-cap space?
But first, let’s understand what’s driving this underperformance among mid-cap funds.
Why the struggle
Experts say the underperformance isn’t driven by a single reason but a combination of factors.
“Mid-cap funds have underperformed largely because active mid-cap managers are confined to the same universe of 150 mid-cap stocks, which is now widely tracked by both fund houses and analysts. To generate alpha, a manager must meaningfully deviate from the index and be right on those calls. That’s getting harder,” pointed out Dhirendra Kumar, founder and chief executive officer of Value Research, an independent investment advisory firm.
Sebi’s 2017 re-categorisation rules tightened mid-cap fund portfolios by requiring at least 65% allocation to companies ranked 101–250 by market capitalization.
The above-mentioned analysis by DSP MF shows that the alpha (i.e. difference between returns generated by active mid-cap funds and Nifty Midcap 150 TRI) has been shrinking since 2018.
The TRI also accounts for dividend gains in the index returns. Similarly, the percentage of outperforming mid-cap funds has been ebbing. The study is based on five-year rolling returns (see graphic for details).
Markets have also become more efficient. The lower end of the mid-cap universe — the 250th stock — now has a market value of around ₹30,000 crore, almost double its December 2021 size.
“Information asymmetry has reduced meaningfully, leaving fund managers with fewer opportunities the market hasn’t already priced in,” says Siddharth Srivastava, head–ETF product & fund manager, Mirae Asset Investment Managers.
Analysts also point out that mid-cap funds might be struggling because there has been a broad-based earnings growth across different pockets of mid-caps in recent years.
“The last five years have seen the mid-cap universe as a whole deliver high earnings growth. Going forward, if this earnings performance turns more selective, active funds would have a fighting chance,” said Aarati Krishnan, head of advisory, Primeinvestor.in.
While there has been a broad-based performance in mid-caps, mid-cap fund managers tend to take more active calls (i.e. deviating from index).
Mid-cap funds typically run a higher active share — about 60% versus large-cap funds’ 40%, pointed out Arun Kumar, author of The 80-20 Money Makeover and former head of research at FundsIndia.
Investment style is another reason. According to Anil Ghelani, head–passive investments and products, DSP Mutual Fund, quality as a factor has not done well in recent years, and mid-cap fund managers typically look for companies with high-quality fundamentals.
Mid-caps are inherently more volatile than large-caps. To manage downside risk, fund managers prefer companies with strong balance-sheets, predictable cash flows, good governance and steady earnings.
Do actives still matter?
On the surface, the data favours passives. But experts caution against drawing large-cap-like conclusions too quickly.
“All mid-caps can’t be painted in same brush. There are several industries and opportunities represented in the mid-cap space. So, it is still a bottom-up stock-picking play. Passive strategy is advisable in segments where information discovery has fully happened. For example, in the case of large-caps, where the company’s fundamentals and business model are already well-known and established,” said Nirav Karkera, head of research at Fisdom, a wealth platform.
“Passive strategy works in large-cap space as institutional investors buy large-caps as a basket. For example, when foreign institutional investors are bullish on India, the allocation happens at Nifty 50-level. But mid-caps are more stock-specific. The underperformance of the mid-cap funds can be attributed to certain investment strategies not working out in recent years,” said Karkera.
Ravi Kumar of Gaining Ground Investment Services warns that passive mid-cap indices force exposure to all constituents — even weaker names — and only exit laggards during periodic reshuffles. Active managers can respond sooner when fundamentals deteriorate.
“Funds that have bet on banking, non-bank financial companies, power sector, etc. have delivered strong performance in recent years. If you are able to pick the right fund manager in the mid-cap space, you can still see significant outperformance,” he added. In fact, mid-cap funds that beat the benchmark in 2024 outperformed by 3–38 percentage points.
“In our experience, the proportion of funds outperforming the index in a category, does keep changing across time. Therefore we tend to switch between passive and active recommendations based on the data,” Krishnan added. For example, about 69% of mid-cap funds outperformed benchmark index in 2024.
Value Research’s Kumar added that when mid-cap funds outperform, they often do so by a wide margin. “Though identifying the eventual winners has become more challenging,” he said.
What should investors do?
Advisors suggest moderation instead of an abrupt switch.
“With mid-caps currently overvalued, we are not allocating aggressively. Once valuations turn reasonable, we will use a combination of passive and active funds,” says Vishal Dhawan, founder at Plan Ahead Wealth Advisors.
However, mid-cap passive funds don’t have long track-record. The oldest mid-cap index fund was launched in 2019.
“Hence, there is little real-market record of how these funds would perform in terms of controlling tracking error, especially during market stresses. As an alternate, funds tracking the Nifty Next 50 Index can be considered. It is not a true mid-cap index, but the risk-reward is similar to that of mid-caps, as it represents stocks beyond the widely-tracked Nifty 50 stocks,” says Pattabiraman, founder of personal finance platform Freefincal.
If you want pure mid-cap exposure through active management, focus on funds run by strong fund managers — but be prepared to track their performance against the benchmark closely. There are more diversified options such as flexicaps and multi-caps in the active space, where exposure is more spread out across market caps.
On the passive side, investors can still build pure mid-cap exposure, but it’s sensible to scale into these options gradually, as passive mid-cap funds are fairly new and need to demonstrate their ability to track the index efficiently.