1 week ago
Index And Flexi-Cap Funds May Offer Less Diversification
An index fund follows a list of stocks chosen by a market index.
A flexi-cap fund has a manager who chooses stocks and can invest in companies of different sizes.
Having both funds does not automatically mean your money is spread widely.
The two funds may own many of the same large companies.
In the examples discussed, some fund combinations had more than 37% weighted overlap.
Their sector exposure was also highly similar.
Active funds can change investments when market conditions change, while index funds follow set rules.
Index funds may cost less, but they do not try to beat their benchmark.
Investors should compare the actual holdings and risks before deciding whether to own both.
Index funds track benchmarks such as the Nifty 50 or Sensex, while flexi-cap funds actively shift across market-cap segments.
Popular flexi-cap funds can overlap substantially with index funds, especially through shared large-cap holdings.
Reported weighted portfolio overlap ranged from 37.57% to 47.92% across three fund combinations.
Sector overlap in the cited combinations ranged from 77.51% to 81.83%.
Experts suggest considering overlap below 35% to 40%, while also examining portfolio weights, sectors, market caps and investment styles.
- Who
- Mutual fund investors, index funds, flexi-cap funds and the quoted expert Subhendu Harichandan of Anand Rathi Wealth.
- What
- The article examines whether holding an index fund and a flexi-cap fund provides genuine diversification or duplicates exposure.
- Where
- The analysis concerns mutual funds and market indices in India, including the Nifty 50, Nifty 500 and Sensex.
- When
- The performance tables use rolling-return data ending in quarter 06/2026.
- Why
- Investors need to assess portfolio overlap, sector exposure, market-cap allocation, investment style, costs and risks rather than simply count the number of funds.
Passive indexing
Active management
Cost and flexibility
Passive indexing
Index funds generally have lower expenses because they do not require the same level of research and portfolio activity, but they follow predefined index rules and rebalance periodically.
Active management
Flexi-cap funds can change allocations across market caps as valuations, earnings potential, fundamentals and market conditions change, but this creates fund-manager and stock-selection risk.
Return potential
Passive indexing
Passive funds aim to replicate their benchmark and are not designed to generate alpha beyond it.
Active management
Active managers may seek alpha through stock selection and changing portfolio positioning, although results depend on the manager’s investment process and risk management.
Diversification
Passive indexing
Using a broader index such as the Nifty 500 may reduce overlap with a flexi-cap fund compared with using a large-cap index, but lower overlap does not guarantee better risk-adjusted returns.
Active management
Adding a flexi-cap fund can still duplicate an index fund because many flexi-cap funds have substantial large-cap exposure and may own major index constituents.
Key facts
- Index funds
- Passive funds that replicate an underlying benchmark such as the Nifty 50 or Sensex.
- Flexi-cap funds
- Actively managed equity funds that can invest across large-, mid- and small-cap companies.
- Suggested overlap level
- Subhendu Harichandan said investors can consider overlap below 35% to 40%, but overlap should not be viewed alone.
- HDFC Flexi Cap and UTI Nifty 50 overlap
- The article cites approximately 50% portfolio overlap.
- Parag Parikh Flexi Cap and UTI Nifty 50 overlap
- The article cites approximately 41% portfolio overlap.
- Reported weighted overlap
- HDFC Flexi Cap with Nifty 500: 41.37%; Kotak Flexi Cap with Nifty 50: 47.92%; Parag Parikh Flexi Cap with Nifty 100: 37.57%.
- Reported sector overlap
- The same three combinations showed sector overlap of 81.83%, 80.94% and 77.51%, respectively.
Quotes
Subhendu Harichandan
Executive Director at Anand Rathi Wealth
“But one can consider overlap below 35 to 40% between the funds; additionally, it is also important to consider that overlap percentage should not be viewed in isolation, as 2 funds can have 40% stock overlap but very different portfolio weights, sector exposure, market-cap allocation and investment styles.”
financialexpress.com
“For instance, if we see the portfolio overlap between popular flexi-cap funds and a Nifty 50 index fund, HDFC Flexi Cap Fund has around 50% portfolio overlap with UTI Nifty 50 Index Fund, while Parag Parikh Flexi Cap Fund has around 41% overlap.”
financialexpress.com
Sources
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