What is Closet Indexing?
Closet indexing occurs when an actively managed equity fund mimics its benchmark index composition closely while charging active management fees (up to 1.5% - 2.0% TER). Investors effectively pay premium fees for returns that barely track the index after deducting expenses.
1. Defining Active Share
Developed by Martijn Cremers and Antti Petajisto, Active Share quantifies the percentage of stock holdings in a mutual fund portfolio that differs from the benchmark index. Active Share above 80% reflects high managerial conviction, whereas below 60% indicates closet indexers.
2. The Cost Penalty of Low Active Share
If a fund manager holds 85% overlap with Nifty 50, only 15% of your capital is being actively managed. Paying full active fees on 100% of capital creates a massive statistical hurdle for outperforming a passive index fund.
3. Screen Active Share on MyPlexus
MyPlexus parses monthly portfolio disclosures across AMCs, computing exact Active Share percentages and tracking variations across market cycles.
