Why Index Investing Works in the US but Not Necessarily in India
Indexing is one of the most powerful ideas in modern investing. But like most powerful ideas, it works best when the conditions are right. In the US, they are. In India, they aren’t — at least not yet.
The numbers don’t lie: active management fails in the US
The data on active management in the US is unambiguous. According to SPIVA’s 2025 scorecard, 79% of actively managed large-cap US equity funds underperformed the S&P 500. Over a 15-year horizon, there is no category in which a majority of active managers outperformed. Not one. Since 2001, the average annual underperformance rate has been 64% — meaning in almost any given year, nearly two-thirds of active managers are simply losing to the index.
This isn’t bad luck or bad managers. It’s structural. The S&P 500 is dominated by companies that genuinely earn their valuations — Apple, Microsoft, Alphabet, Amazon, Nvidia. These companies don’t hold their position because of government relationships or historical inertia. They hold it because they keep innovating, keep growing, and keep reinvesting into products the world buys. Betting against them, consistently, is a losing game.
Why the S&P 500 is so hard to beat
The single biggest reason indexing works in the US is the nature of the companies inside the index. The top US companies are among the largest spenders on research and development anywhere in the world.
R&D spending — US big tech (2022)
Amazon: $73 billion. Alphabet: $39 billion. Meta: $35 billion. Apple: $28 billion. Microsoft: $27 billion. Combined, the top five US tech companies spent over $200 billion on R&D in a single year — more than the entire GDP of many countries. This isn’t overhead. It’s the engine that keeps the index compounding.
When you own the S&P 500 index, you own companies that are continuously trying to make themselves obsolete before a competitor does. That kind of internal pressure produces genuine long-term value. It also makes them extremely hard for a stock-picker to consistently outmanoeuvre.
India is a fundamentally different market
The Nifty 50 is not the S&P 500. The companies inside it are not the same kind of businesses. And the data on active management in India tells a very different story.
According to SPIVA India data, only 12–14% of actively managed large-cap funds outperformed their benchmark over five years. But year-to-year, the picture is volatile — in some periods, two-thirds of active large-cap funds have beaten the index. That inconsistency is itself revealing. It tells you the index isn’t an especially high bar to clear.
In the US, the index is hard to beat because the businesses inside it are exceptional. In India, the index is sometimes easy to beat because many businesses inside it are ordinary — and a careful stock-picker can simply avoid the weakest ones.
The R&D gap is the real story
India’s top companies invest a fraction of what their global peers spend on R&D. Indian industry as a whole spends around 0.3% of GDP on in-house R&D — against a world average of 1.5%, the US at 2.7%, and South Korea at 3.9%.
India’s top IT firms vs global software peers
TCS, Infosys, and HCL — India’s largest software companies — invest roughly 1% of turnover in R&D. The global average for software companies in the top 2,500 R&D spenders is 14%. These companies are world-class at delivery and execution. They are not building the next operating system, the next chip, or the next platform. Their revenues come from serving innovation elsewhere — not creating it.
This isn’t a criticism. It’s a description of what they are. Indian IT companies built genuinely valuable businesses by providing services that global companies needed. That’s a real and profitable model. But it isn’t the same as owning a company with a durable technological moat that compounds globally.
The “bluechip” problem in Indian mutual funds
Open the top ten holdings of most large-cap or bluechip Indian mutual funds. Then open another. And another. You will find remarkable similarity — the same names, similar weights, arranged under different fund names and marketing narratives.
This happens for a structural reason. SEBI regulations require large-cap funds to invest 80% of their portfolio in the top 100 companies by market cap. With that constraint, differentiation becomes nearly impossible. The result is a category where funds carry different names but nearly identical portfolios — competing not on returns but on expense ratios and distribution.
US S&P 500 top holdings
- Apple — hardware, software, services ecosystem
- Microsoft — cloud, enterprise software, AI
- Nvidia — semiconductor design, AI infrastructure
- Alphabet — search, cloud, autonomous vehicles
- Amazon — e-commerce, cloud, logistics
Nifty 50 top holdings
- Reliance Industries — conglomerate, energy, retail, telecom
- HDFC Bank — domestic banking
- ICICI Bank — domestic banking
- Infosys — IT services
- TCS — IT services
The US index is diverse across genuinely differentiated global businesses. The Indian index is concentrated in domestic banking, IT services, and conglomerates. The growth drivers are different. The R&D investment is different. The global competitive position is different.
What this means for Indian investors
It doesn’t mean indexing in India is wrong. A low-cost Nifty 50 fund will still beat the majority of mediocre active funds over time, simply by eliminating manager fees and poor decisions. For most investors, most of the time, that’s a reasonable approach.
But it does mean something important: in India, a genuinely skilled active manager who avoids value traps, concentrates on quality businesses, and thinks independently has a realistic opportunity to beat the index over the long run. That opportunity is structurally larger in India than it is in the US — precisely because the index contains more businesses that don’t deserve to be owned at their current valuations.
Indexing won in the US because the index contains extraordinary businesses. In India, the case for selective, quality-focused investing remains open — not because active managers are smarter, but because the index itself has more room to be improved upon.
The Deodar cedar doesn’t grow in every climate. It thrives where the conditions are right — deep soil, the right altitude, the right roots. Investing is similar. The right strategy depends on where you are, what you’re owning, and whether the businesses underneath your portfolio are genuinely building something — or simply occupying space on an index.