Index Fund vs ETF vs Mutual Fund: Passive or Active?

For most Indian investors putting money into large companies, a low-cost index fund or ETF is the better default, because most actively managed funds have trailed their benchmark over 5 and 10 years after costs. An actively managed mutual fund can still earn its place, mainly in mid- and small-cap stocks and only if you accept a real chance of lagging the index.

This guide treats the question as a three-way choice: an index fund, an ETF, or an active fund. It covers the latest SPIVA India data on how many active funds beat their benchmark, the cost difference in rupees over 20 years, where active management has a better case, and a simple decision flow at the end.

First, the terms: these three overlap

“Mutual fund” is the umbrella. Index funds and ETFs are both mutual fund schemes regulated by SEBI. So the real choice is between two questions: passive or active, and, if passive, index fund or ETF.

• Index fund: a passive mutual fund that copies an index such as the Nifty 50 or Sensex. You buy and sell units with the fund house at the day’s NAV (net asset value, the per-unit value worked out after market close). No demat account is needed.
• ETF (exchange-traded fund): also passive and also tracks an index, but its units trade on the stock exchange during market hours through a broker and a demat account.
• Active mutual fund: a fund manager picks stocks to try to beat a benchmark. Large-cap, mid-cap, small-cap and flexi-cap funds are the common equity types.

The ETF versus index fund question (trading costs, liquidity, SIP convenience) is covered in our ETF vs mutual fund comparison. This article focuses on the bigger decision: whether to pay a manager to try to beat the market at all.

How many active funds beat the index? The SPIVA India data

S&P Dow Jones Indices publishes the SPIVA India Scorecard twice a year. It compares actively managed Indian funds with an S&P benchmark for their category, after fees, and counts funds that closed or merged as failures rather than quietly dropping them.

The latest edition, SPIVA India Mid-Year 2026 (data to 30 June 2026, published 21 September 2026), reported these underperformance rates:

Category (SPIVA benchmark)	Underperformed over 5 years	Beat the benchmark over 5 years	Underperformed over 10 years	Beat the benchmark over 10 years
Large-cap (S&P India LargeMidCap)	85%	15%	74%	26%
ELSS (S&P India BMI)	71%	29%	80%	20%
Mid/small-cap (S&P India SmallCap)	55%	45%	82%	18%

“Beat” here is simply 100% minus the underperformance rate. The previous edition (Year-End 2025, data to December 2025) showed a similar pattern: 84.4% of large-cap funds lagged over 5 years and 76.3% over 10 years. It also found that 27% of funds across all categories did not survive the full 10 years.

Two cautions. SPIVA’s benchmarks are S&P indices, not the Nifty or BSE indices most Indian funds name in their factsheets, so some fund houses dispute the comparison. And the results swing year to year: in calendar 2025, only 12.1% of mid/small-cap funds lagged their benchmark. But across editions, a majority of active funds in every category have trailed over 10 years.

The cost gap: TER of passive vs active funds

The total expense ratio (TER) is the yearly fee taken out of the fund’s assets, deducted daily from the NAV. Since 1 April 2026, SEBI’s new Mutual Funds Regulations split it into a base expense ratio (the fund house’s fee) plus brokerage, transaction costs and statutory levies such as GST. AMFI publishes all of these. The figures below are the full TER.

From AMFI’s TER data for 30 September 2026, worked out by us:

• Nifty 50 index funds: median TER of 0.25% for direct plans and 0.59% for regular plans, across 18 schemes.
• Nifty 50 ETFs: many charge under 0.10%. Nippon India ETF Nifty 50 BeES showed 0.04%. You also pay brokerage and the bid-ask spread when you trade.
• Active large-cap funds: median TER of 1.05% for direct plans and 2.14% for regular plans, across 24 schemes.

So an active large-cap fund costs roughly 0.8 percentage points a year more than a Nifty 50 index fund in direct plans, and close to 1.9 points more if you compare a regular active plan with a direct index fund. The manager has to beat the index by that much every year, before you gain anything.

Worked example: what that gap costs over 20 years

Suppose Priya has ₹10 lakh to invest for 20 years. She compares three options. To isolate cost, assume all three earn the same 12% a year before expenses, meaning the active manager exactly matches the market before fees. The 12% is an assumption for illustration, not a forecast.

Net return is roughly the gross return minus the TER. Treating the daily TER deduction as a straight annual subtraction is a simplification, but it is close enough for comparison.

1. Index fund, direct plan (TER 0.25%): net 11.75%. ₹10,00,000 × 1.1175²⁰ = ₹92.25 lakh.
2. Active fund, direct plan (TER 1.05%): net 10.95%. ₹10,00,000 × 1.1095²⁰ = ₹79.90 lakh.
3. Active fund, regular plan (TER 2.14%): net 9.86%. ₹10,00,000 × 1.0986²⁰ = ₹65.58 lakh.

The gap between the cheapest and the most expensive option is ₹26.66 lakh, on the same market return. For a SIP of ₹10,000 a month for 20 years (₹24 lakh invested, monthly rate = annual net rate converted to monthly, each instalment at the start of the month), the corpus works out to ₹89.25 lakh, ₹81.07 lakh and ₹71.21 lakh respectively, a gap of ₹18.04 lakh. You can test your own numbers with our SIP calculator.

The example shows why small fee differences matter so much: the cost compounds along with the returns, year after year. An active fund only comes out ahead if its manager beats the index by more than the fee gap, consistently, for two decades.

Index fund vs flexi-cap fund

Flexi-cap funds are a popular active alternative to a Nifty 50 index fund. Under SEBI’s categorisation, a flexi-cap fund must keep at least 65% in equity but can move freely between large, mid and small companies. That freedom is the selling point and the risk: results depend heavily on the manager’s calls.

Flexi-cap is not a separate SPIVA category, so there is no clean scorecard for it. In AMFI’s September 2026 data, the median flexi-cap TER was 1.02% for direct plans and 2.21% for regular plans, across 30 schemes. If you want broad market exposure beyond the top 50 companies, a passive alternative is an index fund on a wider index such as the Nifty 500, though these usually cost more than Nifty 50 funds.

When an active fund can make sense

The case for active management is strongest where markets are less efficient: fewer analysts follow the stocks, prices can drift further from fair value, and a skilled manager has more room to add value. In India, that mostly means mid- and small-cap companies.

The SPIVA numbers partly support this. Over 5 years to June 2026, 45% of active mid/small-cap funds beat their benchmark, against 15% of large-cap funds. Over 10 years, though, 82% of mid/small-cap funds still lagged. So the edge is real but patchy, and picking the winners in advance is hard.

• Mid and small caps: active funds have a better relative record, and they can avoid weak or illiquid stocks that an index must hold. See our lists of mid-cap mutual funds and small-cap mutual funds for what to check.
• A satellite, not the core: many investors keep a large-cap index fund as the base and add one or two active mid- or small-cap funds in a smaller share.
• Only in direct plans: paying a regular-plan TER of around 2% adds another hurdle to a bet that is already uncertain.

Three-way comparison

Feature	Index fund	ETF	Active mutual fund
Goal	Match the index	Match the index	Beat the benchmark
Typical TER, Nifty 50 / large-cap (direct)	About 0.25% (median)	Often under 0.10%	About 1.05% (median)
Other costs	Stamp duty; exit load if any	Brokerage, bid-ask spread, demat charges	Stamp duty; exit load if any
How you buy	From the fund house or an app, at NAV	On the exchange via broker, live price	From the fund house or an app, at NAV
Demat account	Not needed	Needed	Not needed
Automatic SIP	Yes	Depends on broker	Yes
Manager risk	None, only tracking error	None, only tracking error	High: results depend on stock picks
Chance of beating the index	None (by design)	None (by design)	15%–45% over 5 years (SPIVA, mid-2026)
Tax (equity)	Same for all: STCG 20% within 12 months; LTCG 12.5% above ₹1.25 lakh a year

Tax does not separate the three. Equity index funds, equity ETFs and active equity funds all follow the listed-equity rules in force since 23 July 2024, and Budget 2026 left those rates unchanged. Our guide on how to reduce capital gains tax covers ways to use the ₹1.25 lakh exemption.

A decision flow

Work through these questions in order:

1. Is this money for large companies or the broad market? If yes, start with a passive option. Most active large-cap funds have lagged over 5 and 10 years.
2. Do you want an automatic monthly SIP with no demat account? If yes, pick an index fund (direct plan). If you already have a demat account and are comfortable placing orders, an ETF can cost less. Check its trading volume and spread first.
3. Do you want mid- or small-cap exposure? Here an active fund is a reasonable choice, as is a Midcap 150 or Smallcap 250 index fund. If you go active, use a direct plan and keep it to a part of your equity money.
4. Are you considering a flexi-cap or other active fund for your core holding? Ask whether you can stay with it through several years of lagging the index. If not, a passive core is easier to live with.
5. Whatever you pick, review it once a year against its benchmark and your asset allocation, not against last month’s best fund.

Common mistakes

• Choosing an active fund on recent returns. A fund at the top of a 1-year table often slips back. SPIVA data shows outperformance rarely persists over long periods.
• Buying the regular plan by default. The regular-plan TER on an active fund was roughly double the direct-plan TER in September 2026 data.
• Comparing an index fund on TER alone. Also check tracking error (how closely it follows the index) and, for ETFs, liquidity.
• Owning several funds that hold the same stocks. A Nifty 50 index fund plus three large-cap active funds is largely the same portfolio at a higher average cost.
• Thinking passive means safe. An index fund falls as much as the market does. It removes manager risk, not market risk.

FAQ

Is an index fund better than a mutual fund?

An index fund is a type of mutual fund, so the real comparison is passive against active. For large-cap exposure, SPIVA India data shows 85% of active funds lagged their benchmark over 5 years to June 2026, so a low-cost index fund is a sound default. Active funds have a better case in mid and small caps.

Should I choose an index fund or a flexi-cap fund?

A flexi-cap fund gives a manager freedom across company sizes and charges more for it (median direct TER of about 1.02% against about 0.25% for a Nifty 50 index fund, AMFI data for September 2026). Choose it only if you accept periods of lagging the index. Many investors hold an index fund as the core and a flexi-cap fund as a smaller addition.

Are ETFs cheaper than index funds?

Usually, on TER: several Nifty 50 ETFs charge under 0.10%. But you also pay brokerage, the bid-ask spread and demat charges, and SIPs are less automatic. For small monthly amounts, a direct index fund often ends up just as cheap and simpler to run.

Do index funds ever beat active funds in falling markets?

Results vary. In the first half of 2026, when the S&P India LargeMidCap fell 4.0%, the average active large-cap fund fell 5.1% (equal-weighted), according to SPIVA. Active funds can hold cash or defensive stocks, but there is no consistent evidence that they protect better in downturns.

Are index funds and active funds taxed differently?

No. Equity index funds, equity ETFs and active equity funds all pay 20% on short-term gains (held up to 12 months) and 12.5% on long-term gains above ₹1.25 lakh a year. Budget 2026 did not change these rates.