Debunking the Index Fund Misconceptions: A Balanced Perspective
Last Update Date: 05-10-2026
Published by freefincal
Abhishek Kumar's role: Wrote this article
Abhishek Kumar wrote this article for freefincal, offering a data-based view that the small shortfall of index funds from costs is by design, and suggesting a core-satellite approach with low-cost index funds at the core.
What Abhishek Kumar said
Are index funds bound to lag the index they track?
Only by a small margin, and that is by design. An index fund aims to replicate its benchmark, not beat it, so a shortfall equal to its expenses is a feature of passive investing rather than a flaw, and those expenses are a fraction of what active funds charge. Tracking error also needs context: liquidity constraints and the mechanics of replication make some deviation unavoidable, and it should be weighed against the far larger and less consistent gap between active funds and their benchmarks.
What does the data say about active funds beating their benchmarks in India?
The independent scorecard for 2024 found a majority of large-cap active funds trailing their benchmark over one year, and in the mid and small-cap segment the large majority lagged over ten years. Part of the reason is cost. Like the house take in a betting pool, fees, trading costs, the market impact of large trades and cash held during rallies all have to be covered before any outperformance reaches the investor, and the higher that friction, the lower the odds of clearing it.
Can I just pick the active funds that are likely to do better?
The evidence suggests this is much harder than it looks. Only a small minority of active funds beat their benchmarks consistently over long periods, and there is little persistence: funds that lead in one period often lag in the next. A fund beating its index once is a remarkable result, not proof of a remarkable talent; the test is repetition. Chasing past winners tends to mean buying after a good run and selling after a poor one, which erodes what the investor keeps.
How should I combine index funds and active funds in a portfolio?
Rather than treating it as either-or, I suggest a core-satellite structure. The core sits in low-cost index funds that track the market closely and give instant diversification across stocks and sectors. Smaller satellite positions in carefully chosen active funds can be used where a manager may add value, perhaps in less efficient segments, accepting the risk that they fall short. For most investors I would make passive the first choice and let active play a complementary role.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on mutual funds
This guest post responds to a social media claim that index funds are bound to lag the market. It explains that index funds are built to track a benchmark, puts costs and tracking error in context, cites SPIVA India 2024 data on active fund underperformance, and notes how rarely outperformance by active funds persists.
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Debunking the Index Fund Misconceptions: A Balanced Perspective