Why Two Mutual Funds With the Same Label Deliver Very Different Returns

In 2024, the best-performing flexi cap fund in India returned 45.7%. The worst returned 4.5%.

That is a 41-percentage-point gap between two funds carrying the same SEBI category label, measured against the same benchmark, sold to investors as broadly interchangeable products. Mid-cap funds showed an even wider spread that year, 57.1% at the top, 11.3% at the bottom.

This is not a one-off. Return dispersion within categories shows up every year, in every category, in every market. And it raises an obvious question: if SEBI has standardised what each category is allowed to hold, why haven't returns standardised too?

The answer is that a category label tells you what a fund is permitted to buy. It tells you very little about what the fund actually does. Here are the five forces that create the gap, roughly in order of how much they matter.

1. Two Funds, Two Very Different Cash Positions

This is the most underrated driver of dispersion in Indian funds. At various points in 2025, some prominent flexi-cap funds held 20–28% of their portfolios in cash, while the average cash level across the top 20 AMCs was under 6%.

Think about what that means. A fund that is 97% invested and a fund that is 75% invested are not the same product, whatever the label says. In a rising market, the cash-heavy fund lags by construction, as a quarter of its money isn't participating. In a falling market, the same cash cushions the decline and becomes dry powder. Neither approach is wrong. But the two funds will produce very different numbers in the same year, and the category label gives you no hint of it.

2. The Freedom Inside the Mandate

SEBI's 2018 recategorisation requires a large-cap fund to hold at least 80% in the top 100 stocks. But which of those 100 stocks, at what weights, plus the entirely free remaining 20%, that is where fund managers actually compete.

Researchers measure this using "active share": how different a portfolio is from its benchmark. Academic work by Cremers and Petajisto found that funds with high active share and patient, low-turnover managers have historically been the ones that outperformed, and that investors should be wary of paying active fees for funds with low active share. Because of the 80% mandate, some Indian large-cap funds hug their index closely while others run concentrated, high-conviction portfolios. Same category. Very different return engines.

3. Same Label, Different Market-Cap Mix

Flexi cap is the clearest example. One flexi cap fund may hold 90% in large caps. Another may hold barely half, with the rest in mid and small caps. In a year when smaller stocks rally, the second fund looks brilliant; when they crash, it looks reckless. Much of 2024's flexi cap dispersion came from exactly this; funds tilted toward mid and small caps rode that rally; conservative ones didn't. The label stayed identical throughout.

4. Sector Bets, and the Trap That Follows

Managers also differ in their sector positioning, overweight financials, underweight IT, and a bet on energy. These bets drive short-term dispersion, and they mean-revert brutally. S&P's SPIVA India research noted that of the six sectors that beat the broad market in 2024, five trailed it in the first half of 2025. A fund's sector call can make it a category topper one year and a laggard the next, with no change in the manager or the process.

5. Costs: the Reason Everyone Cites, and Why it's the Wrong One Here

Expense ratio is the explanation most investors reach for first. It's real, but it's the wrong tool for this particular question. SEBI caps equity fund expenses on a sliding scale by fund size, long set between roughly 1.05% and 2.25%, and cut further to roughly 0.90%–2.10% under the new mutual fund regulations notified in 2025-26, so the cost gap between two funds in a category is typically around or under one percentage point a year. Costs cannot explain a 41-point single-year gap.

What costs do we explain as the long-run gap? A 1% annual cost difference compounds into a large corpus difference over 20 years. Costs are a marathon variable. The four factors above are sprint variables. Confusing the two leads investors to obsess over expense ratios while ignoring cash levels and portfolio composition, the things actually driving this year's dispersion.

The Uncomfortable Part: Winners Don't Stay Winners

If dispersion is this wide, the obvious response is to simply buy last year's topper. The data is unkind to that idea. S&P's US persistence research found that only 0.91% of top-quartile large-cap funds stayed in the top quartile over five years, and no mid- or small-cap fund did. Indian data tells the same story: per SPIVA India, 93% of Indian large-cap funds underperformed their benchmark over the five years to end-2024. Dispersion is real, but it is mostly not predictable dispersion.

There is a fair counterpoint. Dispersion is also the price of possibility: an index fund carries no risk of picking the wrong fund, but no chance of the 45.7% either. And active management does have its moments; 2025 was the best year for Indian mid and small cap managers relative to their benchmark since 2014. The point is not that active funds are bad. The point is that the category average describes no fund you actually own.

What to Do With This

Stop reading category returns as if they describe your fund, and stop ranking funds by last year's number. Instead, look at what creates the gap: the fund's cash level in its latest factsheet, its actual large/mid/small cap split, how different its top holdings are from the benchmark, and its sector concentration. Two funds with the same label can be entirely different machines. The label is where your research should begin, not where it ends.

Sources: SPIVA India Scorecards and Persistence Scorecards (S&P Dow Jones Indices), Ventura Securities category analysis via Business Standard, AMC monthly portfolio disclosures, SEBI (Mutual Funds) Regulations, Cremers & Petajisto active share research.