Active share is a key metric that measures how different a mutual fund's portfolio is from its benchmark index, expressed as a percentage between 0% and 100%. According to reports from Mint, a score of 0% indicates the portfolio is an exact replica of the index, while 100% means the fund holds nothing in common with it. The calculation involves comparing the weight of every stock in the fund with its weight in the benchmark, taking the absolute difference for each, adding them, and dividing the total by 2. For example, a fund with a 35% active share means 35% of the fund's portfolio is invested differently from the index.
As reported by Mint, an active share of 10% would indicate that 90% of the fund more or less mimics the benchmark index, while an active share of 80% means that only 20% of the fund is similar to the index. The metric tells investors what portion of the fund's money is invested differently from the benchmark. Most Indian fund houses do not disclose active share in their factsheets, but investors can compute it from the monthly portfolio disclosures that mutual funds are required to publish.
According to Mint, high active share does not necessarily mean the fund is likely to outperform. The fund may still underperform the index, and fund performance ultimately depends on the quality of the fund manager's stock picks. A fund with almost nothing in common with the index can still be a poor performer if its investments perform poorly. High active-share funds thus don't offer any guarantee of outperformance, and if a fund has high active share but is still consistently underperforming, an investor may want to consider moving out of such a fund.
