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William_Potter
Every active mutual fund New Fund Offer (NFO) comes with a simple pitch: pay a higher fee than an index fund and outperform the market. But has that promise been kept? A bl.portfolio analysis of 275 active equity fund NFOs launched between 2020 and March 2026, comparing each fund’s return since inception with respective benchmark over the same period, shows that 133 funds (48 per cent) have so far underperformed their benchmarks. For sectoral and thematic funds alone, the failure rate is a tad higher at 50 per cent. Basically, it is a coin-flip.
Industry-wide NFO data, including both active and passive launches across categories, show that mutual fund companies launched a staggering 1,187 NFOs in just six years (one NFO every alternative day), raising ₹4.67 lakh crore.
The surge from 64 new launches in 2020 to a record 273 in 2025 also reflects the commercial incentive for AMCs to keep launching fresh products, especially in categories where additional schemes are easier to introduce. SEBI’s one-fund-per-category rule restricts AMCs from launching duplicate large-cap, flexi-cap, or mid-cap funds etc.
As a result, fund houses use the thematic and sectoral category, which has no such restriction, as an open pipeline for new launches (157 such funds have collectively raised ₹1.64 lakh crore since 2020). Every new defence, consumption, or innovation fund generates fresh distributor commissions, assets under management, and come with higher fees.
Failure rate
The year-wise picture reveals a stark reality. Funds launched between 2020 and 2024 show failure rates above 50 per cent, despite operating through one of the longest bull runs in Indian equities from 2020 to 2026. In contrast, failure rates are lower for more recent launches (41 per cent in 2025 and just 12 per cent in 2026 so far), as many are deploying capital gradually leaving to higher cash holdings.
Category-wise, underperformance is most pronounced in dividend yield, mid-cap, and ELSS funds, with failure rates of 80, 73, and 67 per cent, respectively. In contrast, value, multi-cap, and flexi-cap categories show relatively lower failure rates, in the 29–36 per cent range. Among thematic funds, manufacturing (8 out of 10 funds), ESG (6 of 8), and consumption (10 out of 14) record higher failure instances, while banking and financial services (4 out of 16), business cycle (9 of 18), and innovation (6 of 12) fare relatively better. Our analysis uses each scheme’s stated benchmark.
Illustratively, among the biggest laggards, HDFC Defence delivered a 35 per cent CAGR against the Nifty India Defence TRI’s 52 per cent, Shriram Multi Sector Rotation returned -23 per cent versus -6 per cent for the Nifty 500 TRI, and Samco Special Opportunities fell 15 per cent against a 1 per cent gain in the Nifty 500 TRI. On the other hand, notable outperformers include Quant BFSI (23 per cent versus 10 per cent for the Nifty Financial Services TRI), ICICI Prudential Energy Opportunities (2 per cent versus -8 per cent for the Nifty Energy TRI), and TRUSTMF Small Cap (-1 per cent versus -12 per cent for the Nifty Smallcap 250 TRI). TRI represents Total Return Index.
NFO vs Nifty, FD
While benchmark-relative performance is the primary test, broader comparisons with headline equity indices and fixed-income alternatives offer additional investor context. Against the Nifty 50 TRI over identical periods, only about 36 per cent of the funds underperformed. However, when compared with a 7 per cent assumed FD annual return, 50 per cent of the funds underperformed. The FD comparison is not risk equivalent but helps understand how many funds have at least cleared a basic return hurdle. This underperformance becomes more significant because investors in active funds also bear higher expense ratios than passive alternatives.
The investor takeaway is simple. What matters is clarity on the investment mandate, the fund house’s track record in managing similar strategies, and how the new scheme fits into an existing portfolio. In many cases, comparable funds with longer performance histories are already available, offering better visibility on consistency, risk management, and downside behaviour.
Thematic and sectoral NFOs warrant particular caution. These are frequently launched when investor interest in a theme is already high, which can mean valuations are stretched. Such funds can deliver sharp returns in short bursts but tend to be cyclical and require careful entry & exit.
For most investors, a disciplined approach works better. Prioritise diversified funds or low-cost index options. A new fund is not automatically a new opportunity; often, it is simply a new wrapper on an old idea. If considering an NFO, allocate gradually and avoid making it a core holding until it establishes a track record.
Published on March 21, 2026