As mid-cap alpha shrinks, should you consider passive strategies?

Advisers urge a balanced mix—add passives slowly and back strong, active managers, as mid-caps are still pricey

- Jash Kriplani

Mid-cap mutual funds are finding it increasingly hard to stay ahead. Fresh data shows that most active mid-cap fund managers are struggling to beat the very benchmark they're supposed to outperform, intensifying the active vs passive investing debate in one of the market’s most dynamic segments.

Data collated by DSP Mutual Fund shows that, on average, just 34% of actively managed mid-cap funds have outperformed the benchmark index - Nifty Midcap 150 TRI (total return index) over the last six years.

A five-year rolling return analysis (rolled daily from 1 April 2010 to 31 October 2025) reveals a clear trend: since 2018, both the magnitude of alpha and the proportion of outperformers have steadily declined.

This raises an important question: should investors now consider low-cost passive funds that simply track the index, or do actively managed funds still have a role in the mid-cap space? But first, let's understand what’s driving this underperformance among mid-cap funds.

Why the struggle

Experts say the underperformance isn’t driven by one reason but a combination of factors. “Mid-cap funds have underperformed because active mid-cap managers are confined to same universe of 150 mid-cap stocks, which is now widely tracked by both fund houses and analysts. To generate alpha, a manager must meaningfully deviate from the index and be right on those calls. That's getting harder,” pointed out Dhirendra Kumar, founder and chief executive officer of Value Research, an independent investment advisory firm.

Sebi’s 2017 re-categorisation rules tightened mid-cap fund portfolios by requiring at least 65% allocation to companies ranked 101-250 by market capitalization. The above-mentioned analysis by DSP MF shows that the alpha (i.e. difference between returns generated by active mid-cap funds and Nifty Midcap 150 TRI) has been shrinking since 2018.