Does a higher active share make a mutual fund better managed? Experts explain

Is your fund manager actively managing your portfolio or simply tracking the benchmark? Active share can help you understand the difference, as reported by ETBureau.

It measures how closely a mutual fund's portfolio differs from its benchmark index. The metric indicates whether the fund manager is actively selecting stocks beyond the benchmark or largely replicating the index. It is expressed as a percentage, ranging from 0% to 100%.

Consider an equity mutual fund benchmarked to the Nifty. The weight of each stock in the fund must be compared with its weight in the benchmark. This calculation must be done for all the stocks in the index, and the difference must be added up. If the total difference is 60%, divide it by two to arrive at the active share. In this case, the result is 30%. This means 30% of the fund’s portfolio differs from the benchmark.

Analysts generally consider an active share of less than 20% as a sign that the fund’s portfolio is closely tracking its benchmark. Such schemes are often called closet index funds because they are structured like an index fund, while they charge management fees like an actively managed product.

An active share of 20-50% indicates a moderately active fund, 50-80% suggests a highly active fund, while above 80% means the fund manager is taking strong investment bets and the portfolio is significantly different from the benchmark.

No. Active share varies across fund categories. Largecap funds usually have lower active shares because of their investment mandate. In contrast, flexicap, midcap, smallcap, and focused funds generally have a higher active share because fund managers have greater freedom to build portfolios that differ from the benchmark.

If a fund consistently has a low active share compared with its benchmark, it suggests investors are paying active management fees for a portfolio that largely behaves like the index.