Passive vs. Active: Why PMS Wins in Volatile Markets

The Nifty 50 stood at 22,326 on March 28, 2024, and at 22,331 on March 30, 2026—a near-zero absolute return over two full years. During this exact period, actively managed mutual funds across various categories delivered returns ranging from 12% to 22%, while others delivered negative returns. The index, by its very nature, delivered the average of them all.

For the informed investor, this data raises a fundamental question: in a market that moves sideways, does passive investing still make sense? Furthermore, what does a professional portfolio management services (PMS) structure offer that a passive approach cannot? To answer this, we must look beyond the surface of market returns and analyse the structural mechanics of how capital is managed during periods of high volatility.

Understanding Passive Investing: The Promise of the Average

Passive or index investing is designed for simplicity and replication. By holding every constituent of a benchmark like the Nifty 50 in proportion to its market capitalization, an index fund ensures the investor receives the full market return.

Its strengths are undeniable: minimal management fees (typically 0.1–0.2%), zero manager risk, and high reliability during broad, secular bull markets where “a rising tide lifts all boats.”

However, passive investing has a structural ceiling. An index fund cannot exit chronic underperformers, rotate between defensive and aggressive sectors, or adjust cash levels based on market valuations. It is designed to own every stock in the index—including the laggards dragging down total returns—regardless of the economic climate. This is not a flaw, but a trade-off: passive investing promises the market’s return, nothing more and nothing less.

Volatility and the Reality of Return Dispersion

In a flat or volatile market, the concept of return dispersion becomes the most critical factor for an investor. Dispersion refers to the widening gap between the best and worst-performing stocks or sectors. While a broad index “averages away” this gap, active management seeks to position capital toward the winners and away from the losers.

Between March 2024 and March 2026, the spread between top and bottom performers within every mutual fund category was significant. (Source: Sandeep Chordia, CFA)

• Large & Mid Cap: Motilal Oswal (+15.43%), Invesco India (+14.25%), UTI (+12.70%) at the top — Quant Large & Mid Cap (-10.95%) at the bottom
• Mid Cap: Invesco India (+21.26%), Edelweiss (+20.47%) at the top — Quant Mid Cap (-10.92%) at the bottom
• Small Cap: Bandhan (+22.08%), Motilal Oswal (+16.88%) at the top — significant losses at the bottom
• Nifty 50: ~0%

The index averaged all of this away to zero. Active management had the opportunity to capture the spread — in either direction. The argument is not that all active managers outperformed; many did not. The point is that in a volatile, sideways market, dispersion between winners and losers widens enough that the opportunity for outperformance exists — provided the management structure is built to pursue it.

The Structural Advantages of Portfolio Management Services (PMS)

A PMS is a SEBI-regulated investment structure with a minimum ticket size of ₹50 lakh, managed by a registered portfolio manager. It can be structured as a direct equity mandate or an MF-based mandate where the manager allocates capital across mutual fund strategies.

Why Not Just Pick the Right Active Fund?

The data from Section 3 raises a reasonable follow-on question: if active mutual funds can generate significant outperformance, why not simply allocate to the better-performing ones?

The answer lies in structural constraints that apply to every mutual fund regardless of how skilled the manager is. SEBI’s categorisation rules require funds to stay within their defined mandate. A mid-cap fund cannot meaningfully rotate into large-caps or debt even when the risk/reward calls for it.

Redemption pressure means the manager may be forced to sell during a market decline simply to meet outflows from retail investors. And every investor in a mutual fund shares an identical mandate, with no adjustment for individual risk tolerance or drawdown limits.

These are not manager failures. They are regulatory and structural features of the mutual fund wrapper itself. A PMS is a different structure, and that structure removes each of these constraints.

• A Personalised Mandate: Every PMS engagement is governed by a Portfolio Management Agreement and an Investment Policy Statement (IPS). The IPS defines the investor’s return objectives, risk tolerance, and drawdown constraints — something no mutual fund or index fund operates with, since a scheme’s objective applies uniformly to every investor in it.
• Multi-Strategy Allocation: A passive index fund tracks one benchmark. A PMS can allocate simultaneously across asset classes and strategies within a single managed portfolio, with allocations calibrated to the investor’s Portfolio Agreement. The composition of that allocation can shift as market conditions change, which a single-index structure cannot do.
• Dynamic Rebalancing: The Nifty 50 reconstitutes on a semi-annual review schedule. Between reviews, the index holds whatever it holds regardless of changing conditions. A PMS has no such constraint. Repositioning is condition-driven, not calendar-driven.
• Explicit Drawdown Management: In a passive fund, drawdown is whatever the index experiences. In a PMS, drawdown management is a stated objective within the Portfolio Agreement. The manager can use cash buffers or defensive tilts to limit capital erosion during corrections. This is a capability passive investing does not have.

When Passive Investing Remains the Superior Choice

The case for active management is not universal. In broad bull markets where most stocks rise together and return dispersion is low, the fee advantage of a passive fund is harder to overcome. The lower the dispersion, the less room there is for active positioning to add value.

For investors with very long horizons who want simple, low-cost market exposure and have no specific drawdown requirements, an index fund is a rational and defensible choice.

The fee differential matters most in this context. A PMS charges for active management, discretionary decision-making, and a mandate built around a specific investor. In most structures, this translates to an annual management fee of 1–2%, with performance fees layered on top in many cases.

In a high-dispersion, volatile market, those capabilities have demonstrated room to generate returns that justify the cost.

In a calm, uniformly rising market, that room narrows. The market environment determines whether active management earns what it charges, which is precisely why the 2024 to 2026 Nifty period is a relevant reference point for this discussion.

The Market Environment as the Variable

The debate between active and passive investing is rarely about which is “better” in a vacuum; it is about which is better suited to the current market environment. Volatile, sideways markets—where the index remains flat but individual sectors fluctuate wildly—provide the ideal conditions for active management to prove its value.

The 2024–2026 Nifty data makes the case plainly: when the index delivers zero, capturing the average is no longer a strategy. For investors with a defined return objective and a specific drawdown tolerance, the relevant question is not active versus passive in the abstract — it is whether the current market environment creates enough dispersion for active management to earn its cost.

In volatile, sideways markets, the data suggests it does. In broad bull runs, the fee drag often wins. The market environment is the variable. The structure of your investment vehicle determines whether you are positioned to respond to it.

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