Active Share

Active Share was introduced by Martijn Cremers and Antti Petajisto in their 2009 research paper and has since become a widely used metric in fund evaluation globally and in India. The calculation sums the absolute differences between the portfolio weights of each security and the benchmark weights of those securities, then divides by two to adjust for double-counting.

A fund with Active Share of 20% is highly index-like — most of its holdings mirror the benchmark closely, and only 20% of the portfolio (by weight) differs from the index. A fund with Active Share of 80% or above is genuinely differentiated from the benchmark, with most of its capital deployed in positions that differ significantly from index weights.

In the Indian mutual fund industry, Active Share became a topic of considerable regulatory and investor interest following SEBI's push for transparency in fund categorisation. Funds that market themselves as active funds but maintain low Active Share effectively deliver index-like returns while charging active management fees — a practice linked to Closet Indexing. SEBI's 2017 categorisation circular, which mandated minimum portfolio compositions for each fund category, indirectly encouraged higher Active Share for genuinely active categories like Small Cap and Mid Cap funds.

Research on Indian mutual funds has found a wide dispersion in Active Share across the industry. Multi-cap and flexi-cap funds tend to have varying Active Share depending on the manager's conviction, while large-cap funds — particularly those benchmarked against Nifty 50 or Nifty 100 — have often shown lower Active Share given the mandate to invest a minimum 80% in large-cap stocks, many of which are major index constituents.

Active Share alone is not a sufficient measure of fund quality. High Active Share means high differentiation from the index, which creates the possibility of both significant outperformance and significant underperformance. Academic research globally has found that high Active Share combined with low portfolio turnover has historically been associated with better long-term performance, while high Active Share with high turnover (frequent repositioning) has not reliably delivered alpha after costs.

For Indian investors evaluating PMS schemes or AIF Category I/II equity strategies, Active Share provides a useful filter to distinguish genuinely high-conviction managers from those who charge active fees for near-passive exposure.