Active share decoded: The metric that reveals a fund's true strategy

Is your fund manager truly active or just hugging the benchmark? Active share can help you find out.

WHAT IS AN ACTIVE SHARE IN A MUTUAL FUND SCHEME?

It measures how a mutual fund scheme’s portfolio is stacked up against its benchmark index. It also shows whether the fund manager is largely mirroring the index or buying stocks outside the index. The result is shown in percentage terms up to 100%.

WHY DOES ACTIVE SHARE MATTER?
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.

HOW IS ACTIVE SHARE CALCULATED?
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. For example, Reliance Industries has a weight of 6% in the fund, while the stock’s weight in the Nifty is 9%. Here, the difference is 3 percentage points. 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.

HOW IS ACTIVE SHARE INTERPRETED?

A: 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.

IS ACTIVE SHARE THE SAME ACROSS ALL EQUITY MUTUAL FUND CATEGORIES?

A: No. Active share varies across fund categories. Largecap funds usually have lower active share because regulations require them to invest at least 80% of their money in the top 100 companies by market capitalisation. 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.

DOES A FUND WITH A HIGHER ACTIVE SHARE MAKE IT A BETTERMANAGED FUND?
A higher active share does not necessarily mean a fund is better managed or will outperform. It only shows that the fund manager is taking active bets and is building a portfolio that differs from the benchmark. While this increases the chances of outperformance, there is also a risk of underperforming in shallow markets.