Reviewed 2 October 2026. An index fund follows a specified index strategy. An active fund uses investment decisions within its mandate. Both can lose value; neither label determines suitability on its own.
What an index fund tries to do
The objective is generally to track an index, rather than select securities to outperform it. The index itself may cover a broad market, a sector, a theme or another strategy. Read its construction rules: an index label does not automatically mean broad diversification.
Costs, cash holdings, rebalancing and execution can cause fund performance to differ from the index. Tracking difference describes the return gap over a period; tracking error describes variability in that gap. Compare the same benchmark and dates.
What an active fund tries to do
An active manager selects investments under the scheme’s permitted strategy. That introduces decisions about holdings, timing and concentration. A successful past period does not show that the manager will outperform in your holding period. Check whether a manager or mandate change makes older results less relevant.
Compare like with like
| Check | Practical question |
|---|---|
| Exposure | Are the funds investing in comparable assets? |
| Benchmark | Is the return series comparable and inclusive of distributions? |
| Plan and costs | Are both direct or both regular plans? |
| Risk | How concentrated are the holdings? |
| Access | Are there trading spreads or exit restrictions? |
A simple cost scenario
For an illustration, ₹10 lakh growing at a constant net 8% a year for twenty years becomes ₹46.61 lakh. At 7% it becomes ₹38.70 lakh, a difference of about ₹7.91 lakh. This isolates a one-percentage-point net-return gap; it does not predict how an active or index fund will perform. Published NAV-based returns already reflect fund expenses, so avoid deducting them twice.
Read research carefully
If you use an industry performance study, record the period, fund category, benchmark, treatment of closed funds and report date. Do not replace its benchmark with Nifty 50 unless the study actually uses that benchmark. We have removed the earlier unsourced performance percentages and model portfolios from this guide.
Sources and further reading
Useful tools and related guides
Educational information: The Invest Mate does not provide personalised financial advice. Examples are illustrations, not promised returns. Check applicable rules and product documents before acting.
