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Share Market May 2026 · 10 min read

Index Funds vs Active Mutual Funds: Expense Ratios & Alpha Decay in 2026

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Renjith Pillai

Senior Systems Architect & Financial Analyst

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Over the past decade, active fund managers in the Indian large-cap category have struggled to generate alpha over their benchmark indices. Index funds offering 0.05% expense ratios have gained massive popularity.

The Impact of Expense Ratio Compounding

An active mutual fund charging a 1.5% expense ratio creates a massive drag on compounding over 25 years compared to a direct index fund charging 0.10%. That 1.4% annual difference can reduce your ultimate retirement corpus by up to 25%!

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Frequently Asked Questions

Should I choose passive index funds for mid-cap and small-cap investing?+
In small-cap and mid-cap categories, active fund managers still generate excess alpha due to market inefficiencies, whereas large-caps are best captured via low-cost index funds.
What is tracking error in index funds?+
Tracking error measures how closely an index fund mirrors its benchmark index. Lower tracking error indicates tighter replication.

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R

Renjith Pillai

Senior Software Engineer & Network Specialist

Renjith Pillai is a senior software engineer and financial tools author with over 12 years of experience. He built EasyCalcs.in to provide high-precision, privacy-first technical tools and financial calculators for investors, engineers, and consumers.