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Passive funds are mutual fund schemes that do not rely on active decision-making. These funds are designed to follow a market index such as the Nifty 50, Nifty 100, or Nifty 250. Instead of choosing individual stocks, the fund invests in the same companies and in the same proportion as the index.
In contrast, focused funds follow an “active investment approach” and invest in a limited number of stocks (not more than 30). Usually, the fund manager selects these stocks based on research and conviction.
Okay, but which mutual fund type can potentially outperform the Nifty 50? Read this article to first understand the focused and passive funds' meaning. Next, we will learn which scheme may have a greater potential to beat or outperform the Nifty 50 index.
Table of Content
What are Passive Investment Funds?
As mentioned before, passive mutual funds follow a market index (say Nifty 50). For those unaware, an index is a group of selected companies that represent a part of the stock market. The purpose of a passive fund is to try to match the return of the index it follows (not to outperform or earn more than the index).
These funds do not involve regular buying or selling based on market views. The fund invests in the same companies (and in the same proportion) that are part of the index. Changes are made only when the index itself changes, such as when a company is added or removed from the index.
For example,
A Nifty 50 index fund invests in the 50 companies that form the Nifty 50 index.
If a company accounts for 10% of the index, the fund will also invest 10% of its money in that company.
In this way, the fund’s performance could closely follow the performance of the index.
What are Focused Equity Funds?
Focused funds are a type of equity mutual fund. As per SEBI regulations, a focused fund:
Can hold a maximum of 30 stocks and
Must invest at least 65% of its total assets in equity and equity-related instruments
Okay, but what’s the main idea? The idea is to invest more money in a few companies that the manager believes have strong potential (instead of spreading investments across many stocks). Due to this concentration, each stock may have a larger impact on the fund’s performance.
Unlike passive funds, focused funds do not track an index. The fund manager decides:
Which stocks to buy
How much to invest in each
When to make changes
The portfolio can change if the manager’s view on a company or the market changes. Furthermore, focused funds do not have limits on the type of companies they can invest in. As per the fund manager’s discretion, a focused mutual fund can invest:
In large-cap, mid-cap, and small-cap stocks and
Across different sectors of the economy
Which mutual fund type can potentially outperform the Nifty 50?
Now that you understand how passive index funds and focused equity funds work, let’s understand how portfolio concentration influences the ability to outperform the Nifty 50.
But First, Let’s Know What It Means to “Beat” the Nifty 50
The Nifty 50 represents India’s 50 largest companies. It reflects the average performance of these companies, weighted by their market value. To outperform the Nifty 50, a fund must deliver higher returns than this index over a given period (after accounting for costs).
Note that a passive index fund tracking the Nifty 50 is not designed to beat it. It may move almost in line with the index, rising and falling as the index does. Only actively managed funds have the possibility (if even) of outperforming the Nifty 50.
Why most diversified active funds struggle to beat the Nifty 50?
Many equity mutual funds hold 50 to 100 stocks. When a portfolio holds stocks in such huge numbers, it starts to resemble the market itself. As a result:
Strong performers may get diluted by weaker ones
Returns may stay close to the index
After expenses, returns may fall below the index
This is why many diversified active funds fail to consistently outperform the Nifty 50 over long periods.
How Concentration Changes the Equation
Now, focused funds take a different approach. Instead of spreading money across many stocks, they invest in a limited number of high-conviction ideas. Due to this investment style:
Each stock could have a larger impact on returns
If selected companies perform better than the Nifty 50 companies on average, the fund may “potentially outperform” the index
The fund manager’s skill plays a central role
This concentration is the main reason why focused mutual funds may have a potential chance of beating the Nifty 50.
But Higher Return Potential Comes with Higher Risk
Realise that concentration increases both upside and downside risk. That’s because:
If the chosen stocks perform well, returns can exceed the Nifty 50 but
If a few key stocks underperform, losses can also be larger than the index
Thus, focused mutual funds can show higher volatility + periods of underperformance. So yes, concentration may potentially beat the Nifty 50, but only when the fund manager’s stock choices are right, and the investor stays invested for a full market cycle.
How to start SIP in Index Funds?
Conclusion
So now you know what focused and passive funds are and which mutual fund type may have the potential to beat the Nifty 50. Passive mutual funds are designed to track a market index and not to outperform it.
Thus, a passive fund that follows the Nifty 50 will invest in the same companies and in the same proportion as the index. Its objective could be to mirror the index’s performance, and your returns are likely to be close to the index returns (subject to tracking error and costs).
In contrast, focused funds follow an active investment approach. They invest in a limited number of stocks, up to 30, selected by the fund manager. A focused fund may invest in companies from within or outside the Nifty 50 universe. This concentrated structure gives it a higher potential to outperform the Nifty 50 but with higher risk than diversified passive funds.
However, there is no guarantee that a focused fund will beat the Nifty 50. The outcome depends on the fund manager’s stock selection, market conditions, and your investment time horizon.
What is the difference between Passive Funds and Active Funds?
Disclaimer:
The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
