The Indian mutual fund industry observed a notable growth, with its AUM rising from ₹26.86 trillion in September 2020 to ₹75.61 trillion in September 2025, nearly tripling in these five years. With more investors joining the market and competition intensifying, what truly sets a fund apart?
In this fast-moving scenario, active portfolio management is a types of portfolio management that takes center stage. It provides flexibility to adapt to the market conditions, while aiming for higher returns than a benchmark index, by implementing risk management strategies. As we look into how active portfolio management works, it becomes clear why it’s becoming the cornerstone of mutual fund strategies.
This blog aims to talk about active portfolio management, its strategies, and how it is different from passive portfolio management. Read further to know more.
What Is Active Portfolio Management?
Let’s quickly discuss what an active fund is: An active fund is a type of mutual fund that is managed by a professional fund manager who aims to beat its own benchmark index.
Active portfolio management is an investment strategy where fund managers actively participate in decision-making regarding buying and selling of securities. To outperform a benchmark or market index, such as the S&P 500 or Nifty 50.
This strategy involves continuous market analysis, stock picking, sector rotation, and risk management to achieve higher returns than the market, but it often incurs higher costs due to frequent trading.
How Active Management Works
This strategy requires proactivity, thorough research, and specialised knowledge to consistently outperform its benchmark index.
- Defining Objectives: First, the fund manager sets investment objectives, measures risk level, and time horizon as per the investors to create an Investment Policy Statement (IPS).
- Market Research and Analysis: Next, the fund manager conducts research on companies, market trends, and economic indicators to find undervalued stocks.
- Construction of Portfolio: After that, the manager builds a portfolio by selecting securities depending on factors like the risk-to-reward ratio of the securities, market conditions, and the investment objectives.
- Tracking and Adjustment: Then, the manager continuously tracks the portfolio and the market to check for deviation and makes adjustments to adapt to changing market conditions or to maintain alignment with the investment goals.
Advantages of Active Portfolio Management
The main advantage of active portfolio management is its goal to beat the market and generate higher returns, which is known as ‘alpha’.
- Prospective higher returns: Active management aims to earn returns that exceed returns from a passive, market-tracking index. The fund managers go for undervalued stocks or take advantage of short-term price fluctuations to create greater value for investors.
- Enhanced risk management: In case of a market downturn, active managers take defensive positions or shift to more stable assets to limit losses and protect the capital, unlike passive funds that must hold their index positions.
- Flexibility and customisation: Active management responds and adapts to economic shifts, geopolitical events, and market trends proactively. Portfolios are constructed to align with investors’ specific financial goals, risk tolerance, and time horizon.
- Access to diverse strategies: Active fund managers use a variety of techniques, including stock picking, sector rotation, and fundamental and technical analysis, to optimise returns.
Drawbacks & Risks
- Higher Costs: Active portfolio managers charge higher fees to compensate for their extensive research and frequent trading activities. Moreover, the frequent buying and selling of securities results in higher brokerage and trading commissions.
- Risk of Underperformance: Active management carries a significant risk of underperforming the market or its benchmark index, especially over the long term. It is seen that most active funds fail to outperform their benchmarks after accounting for fees.
- Inconsistency in Returns: The performance of an actively managed portfolio is based on skill and timing of the fund manager’s decisions, and incorrect timing or poor security selection could lead to a significant loss.
- Low Tax-Efficiency: The frequent trading activities result in the realisation of short-term capital gains, which are taxed at a higher rate in comparison to long-term gains.
Active vs. Passive: What’s the Difference?
When comparing active vs passive portfolio management, the key distinction lies in the control and intent.
| Features | Active Portfolio Management | Passive Portfolio Management |
| Strategy | It involves constant research, analysis, and buying and selling of securities, to beat the market index. | It involves lower trading activities, with a focus on buy-to-hold and mirroring a benchmark. |
| Goal | To generate higher returns compared to the market (alpha). | To track and replicate the market, instead of aiming to outperform it. |
| Costs | It involves high management fees and expense ratio, due to frequent trading and research. | It involves lower costs due to low trading activity. |
| Risks | It involves higher risks and volatility. | It involves lower risks compared to active management, as the returns align with the market. |
| Tax-efficiency | Frequent trades generate short-term gains, making it subject to short-term capital gains tax, which is higher than long-term capital gains tax. | It focuses on holding securities for the long-term. So, it is more tax-efficient, as long-term capital gains are taxed at 12.5% on gains above ₹1.25 lakh. |
Market Trends: Are Active Managers Gaining Ground?
The images below show the latest data revealed by Stoxo, which is a mixed picture for active management in 2025. It represents passive funds continuing to grow their market share, driven by lower costs and regulatory ease, while active managers are regaining their grip during periods of volatility.
The results shown by Stoxo indicate that consistent outperformance in large-cap segments remains tough, but skilled managers still find value pockets in mid and small-cap sectors.
In short, the market is shifting toward a hybrid approach, where both active and passive play distinct yet complementary roles.
Emerging Tools: Active ETFs & Hybrid Strategies
Active ETFs
Active exchange-traded funds (ETFs) blend professional management with the liquidity and transparency of ETFs. It allows fund managers to make research-based investment decisions to outperform benchmarks.
These ETFs are considered more cost-effective compared to other mutual funds and offer tax advantages through ‘in-kind’ buying and redemption processes that reduce short-term capital gains. Given the growing market volatility, changing regulations, and rising demand for flexible investment options, it drives its popularity among investors.
Hybrid Strategies
Hybrid strategies are a blended approach that incorporates both active and passive investment styles within a portfolio. This may involve different types of funds, such as active equity funds and passive debt ETFs, or utilising funds with built-in active and passive components.
It allows investors to minimise the costs by using low-fee passive funds for a wider scope and pay higher fees only for the active management required to pursue short-term opportunities.
Conclusion
As markets continue to be complicated, the pros and cons of active portfolio management continue to shape investment decisions.
Active portfolio management requires skill, timing, and adaptability. It aims to outperform benchmarks through research and timely decisions, with a potential for higher returns. But at a higher cost and risk.
So in the end, the choice between active and passive management depends on their risk tolerance, financial goals, and comfort level with market unpredictability.
FAQ‘s
Active portfolio management is an investment strategy where fund managers or investors actively participate in making decisions regarding buying and selling securities to outperform a benchmark or market index, such as the S&P 500 or Nifty 50. It highly relies on market research, stock selection, and timing decisions to generate better returns.
Active management aims to beat the market through strategic decisions and involves higher costs and risk, while passive management simply mirrors an index, which involves lower fees and consistent, market-aligned performance.
Active portfolio management requires continuous research, analysis, and trading. These activities increase fund managers’ fees and brokerage costs, making it costlier than passive funds.
Few active fund managers manage to beat their benchmark over the long term, while most fail to do so. The market unpredictability and higher fees limit consistent outperformance, though skilled managers can succeed during specific market cycles.
Active ETFs are professionally managed with an aim to outperform a benchmark, unlike passive ETFs that track an index. Active ETFs involve selective investment decisions and offer more flexibility and transparency.
Active management might be suitable for investors with a long time horizon, but only for those willing to bear higher costs and short-term fluctuations in pursuit of greater returns. Investors seeking stability and lower expenses may prefer passive strategies.
