2025 tests active largecap funds' outperformance amid tougher markets

The two-year outperformance streak of active largecap funds may be nearing its end amid increasingly challenging market conditions. As of December 4, only one in three active largecap schemes (direct plans) managed to outperform the BSE 100 Total Return Index (TRI) on a year-on-year basis.

 

The picture is even weaker for regular plans, with just two schemes managing to stay ahead of the benchmark.

 

The latest dip in performance follows an extended period of strong showing by active fund managers. In 2024, as many as 86 per cent of direct plans in the largecap category outperformed the BSE 100 TRI. In 2023, the proportion stood at 73 per cent. By contrast, 2022 had been a challenging year, with only 14 per cent of direct plans managing to beat the benchmark.

 

Experts attribute the underperformance of two-thirds of active largecap schemes in 2025 to a mix of factors that may vary across schemes. 

 

According to analysts, a reversal in market dynamics could be one of the main reasons behind the shift. The cyclical nature of active fund performance across categories is often linked to the relative strength of largecap, midcap and smallcap segments.

 

While benchmarks remain confined to their respective market cap universes, active funds typically hold some exposure across segments. In the case of largecap funds, managers can allocate up to 20 per cent of the portfolio to mid and smallcap stocks.

 

The strong performance of largecap funds in recent years coincided with a sharper rally in midcap and smallcap stocks vis-a-vis largecap shares. The slump in 2025 is likely to have been weighed down by the reversal in this trend.

 

So far this year, the Nifty 50 is up 9.3 per cent, while the Nifty Midcap 100 has gained just 4.3 per cent and the Nifty Smallcap 100 is down over 8 per cent.

 

There are other possible reasons as well.

 

"Lack of proper portfolio churn, inappropriate allocation to outperforming stocks and limited large cap universe could be the reasons for underperformance. The investment style also has a bearing on the performance. For example, momentum factor had a strong run in 2023 and 2024 but this year it did not work. Most active schemes have a style bias, be it value, growth or momentum," said Rushabh Desai, Founder, Rupee With Rushabh Investment Services.

 

Largecap funds are considered the most difficult category for fund managers, given the relatively smaller universe.

 

“Active largecap funds face structural hurdles that make consistent outperformance difficult. Higher costs, tighter risk controls, and cash buffers reduce net returns, while a narrow universe of well-researched largecap stocks limits mispricing opportunities. Managers also operate within regulatory and benchmarking constraints that restrict meaningful deviations from the index,” said Vishal Dhawan, founder & CEO, Plan Ahead Wealth Advisors.