If you are a new or existing mutual fund investor investing in both an index fund and a flexi-cap fund, you may think that you are diversifying your money across two different strategies. But is your portfolio actually diversified enough?
So, if you are investing in both, what is the difference between them, and how do they work?
Does an actively managed flexi-cap fund provide meaningful diversification alongside a passive index fund, or are you simply investing in many of the same stocks through two different fund categories?
Understanding portfolio overlap, risks, and the fund manager’s investment strategy can help investors decide whether holding both in the same portfolio makes a better investment decision or not.
What are index funds?
Index funds are passive investment funds that replicate the performance of an underlying benchmark, such as the Nifty 50 or Sensex, and passive investing can be categorized into two types: one is market cap-based passive funds like Nifty 50, 150, or small-cap funds, and the other is strategy-based passive funds like factor-based index funds.
When it comes to cost, it appears attractive with a slightly lower expense ratio due to the absence of research and portfolio activity, but beyond the cost, one needs to understand other challenges associated with passive investing.
Passive investing is associated with multiple challenges like no alpha generation and periodic rebalancing at fixed intervals, which limits its flexibility to adopt emerging changes in the market quickly.
Therefore, investors should evaluate funds not only on the basis of cost, but also on the potential for alpha generation, risk management and the consistency of the fund manager’s investment process.
Top performing index mutual funds
| Scheme Name | Launch Date | AUM in Rs (Crore) | Total expense ratio (TER) (%) | 1-Yr Return (%) | 3-Yrs Return (%) | 5-Yrs Return (%) | 10-Yrs Return (%) |
| Nippon India Nifty Midcap 150 Index Reg Gr | 05-02-2021 | 2,727.38 | 0.88 | 9.08 | 16.83 | 17.54 | – |
| Motilal Oswal Nifty Midcap 150 Index Reg | 02-09-2019 | 3,910.83 | 1.12 | 8.87 | 16.79 | 17.48 | – |
| Motilal Oswal S&P 500 Index Reg Gr | 05-04-2020 | 4,499.85 | 1.07 | 29.15 | 26.18 | 16.93 | – |
| Motilal Oswal Nifty Small Cap 250 Index Reg | 05-09-2019 | 1,252.89 | 1.11 | 7.19 | 16.05 | 15.96 | – |
| Nippon India Nifty Small Cap 250 Index Reg Gr | 10-10-2020 | 3,391.28 | 1.01 | 7.27 | 15.73 | 15.79 | – |
| DSP Nifty Next 50 Index Reg Gr | 01-02-2019 | 1,389.38 | 1.01 | 9.73 | 18.51 | 13.53 | – |
| Kotak Nifty Next 50 Index Fund Reg Gr | 03-03-2021 | 1,246.53 | 0.66 | 9.88 | 18.52 | 13.52 | – |
| UTI Nifty Next 50 Index Reg Gr | 05-06-2018 | 7,360.43 | 0.88 | 9.79 | 18.52 | 13.39 | – |
| SBI Nifty Next 50 Index Fund Reg Gr | 10-05-2021 | 2,272.76 | 0.76 | 9.82 | 18.51 | 13.38 | – |
| ICICI Pru Nifty Next 50 Index Gr | 05-06-2010 | 9,934.95 | 0.77 | 9.62 | 18.42 | 13.35 | 12.53 |
Source: Advisorkhoj. Based on rolling return data ending in quarter 06/2026
What are flexi-cap funds?
Flexi-cap funds are actively managed equity mutual funds and they have the flexibility to invest across market caps without being restricted to a predetermined market-cap allocation. This allows the fund manager to dynamically allocate capital across market segments based on valuations, earnings potential, business fundamentals and market conditions.
One of the key advantages of flexi-cap funds is that they can change their portfolio positioning as market opportunities evolve.
For instance, when large caps become relatively expensive and mid or small caps offer better risk-reward opportunities, the fund manager can increase allocation towards those segments, and vice versa and this provides greater flexibility compared with passive strategies, where portfolio weights are largely determined by the underlying index.
However, this flexibility also creates selection risk and the success of a fund depends on the fund manager’s stock-selection ability, investment process and risk management.
Top performing flexi-cap mutual funds
| Scheme Name | Launch Date | AUM in Rs (Crore) | TER (%) | 1-Yr Return (%) | 3-Yrs Return (%) | 5-Yrs Return (%) | 10-Yrs Return (%) |
| Quant Flexi Cap Gr Reg Plan | 01-09-2008 | 7,223.67 | 2.18 | 15.29 | 16.19 | 15.49 | 18.46 |
| Parag Parikh Flexi Cap Reg Gr | 24-05-2013 | 148,429.00 | 1.3 | -1.88 | 13.63 | 12.37 | 16.3 |
| Motilal Oswal Flexi Cap Fund Reg Gr | 08-04-2014 | 13,940.38 | 2.24 | 3.04 | 19.89 | 12.84 | 12.51 |
| Kotak Flexi Cap Gr | 05-09-2009 | 55,549.58 | 1.48 | 2 | 12.4 | 11.35 | 12.73 |
| JM Flexi Cap Gr | 23-09-2008 | 5,148.17 | 2.27 | 3.54 | 14.77 | 16 | 15.63 |
| ICICI Pru FlexiCap Gr | 07-07-2021 | 24,099.78 | 1.72 | 10.99 | 17.87 | 15.59 | – |
| HSBC Flexi Cap Gr | 24-02-2004 | 5,717.88 | 2.14 | 8.52 | 16.61 | 13.99 | 12.78 |
| HDFC Flexi Cap Gr | 01-01-1995 | 110,736.41 | 1.37 | 4.11 | 16.59 | 18.34 | 15.5 |
| FranklIn India Flexi Cap Gr | 29-09-1994 | 19,509.44 | 1.76 | -1.12 | 12.31 | 13 | 12.75 |
| Edelweiss Flexi Cap Reg Gr | 05-01-2015 | 3,612.71 | 2.12 | 3.98 | 14.6 | 12.9 | 14.11 |
Source: Advisorkhoj. Based on rolling return data ending in quarter 06/2026
Does this combination diversify your portfolio or duplicate it?
Investors should understand that having multiple funds in a portfolio does not necessarily mean that the portfolio is well diversified; one should evaluate the portfolio based on underlying stocks, sectors, market-cap exposure and investment style, rather than simply counting the number of schemes.
“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. Similarly, Kotak Flexicap Fund also has around 50% overlap with the Nifty 50 index,” said Subhendu Harichandan, Executive Director, Anand Rathi Wealth.
This indicates that simply combining an actively managed flexi-cap fund with a Nifty 50 index fund does not necessarily provide significant diversification, as both can have substantial exposure to the same large-cap stocks. Therefore, investors should look beyond the fund names and evaluate portfolio overlap and the underlying exposure.
Sector overlap of flexi cap funds vs index funds
| Group/Investment | HDFC Flexi Cap Gr | Kotak Flexicap Reg Gr | Parag Parikh Flexi Cap Reg Gr | ICICI Prudential Nifty 500 Idx Dir Gr | UTI Nifty 50 Index Fund Reg Gr | ICICI Pru Nifty 100 ETF |
| Basic Materials | 3.80 | 13.67 | 0.89 | 8.46 | 7.16 | 7.79 |
| Communication Services | 3.04 | 4.03 | 10.86 | 4.07 | 5.37 | 4.37 |
| Consumer Cyclical | 17.83 | 12.81 | 10.69 | 12.57 | 11.79 | 12.46 |
| Consumer Defensive | 1.58 | 2.01 | 7.63 | 5.74 | 5.70 | 6.65 |
| Healthcare | 12.73 | 6.20 | 5.11 | 7.38 | 4.81 | 5.42 |
| Industrials | 10.21 | 17.67 | 0.63 | 11.20 | 7.54 | 8.42 |
| Real Estate | 2.76 | 0 | 4.70 | 1.13 | 0 | 0.56 |
| Technology | 5.65 | 4.23 | 14.30 | 7.74 | 8.37 | 7.12 |
| Energy | 2.95 | 5.22 | 6.41 | 7.04 | 10.42 | 9.35 |
| Financial Services | 36.52 | 31.48 | 30.50 | 30.59 | 36.17 | 33.27 |
| Utilities | 2.88 | 2.64 | 8.24 | 4.04 | 2.62 | 4.54 |
| Sectors | HDFC flexi cap & Nifty 500 | Kotak flexi & Nifty 50 | Parag parikh flexi cap & Nifty 100 |
| Basic Materials | 3.80 | 7.16 | 0.89 |
| Communication Services | 3.05 | 4.04 | 4.38 |
| Consumer Cyclical | 12.57 | 11.79 | 10.70 |
| Consumer Defensive | 1.58 | 2.01 | 6.66 |
| Healthcare | 7.39 | 4.82 | 5.11 |
| Industrials | 10.22 | 7.55 | 0.63 |
| Real Estate | 1.13 | 0.00 | 0.56 |
| Technology | 5.66 | 4.24 | 7.12 |
| Energy | 2.95 | 5.23 | 6.42 |
| Financial Services | 30.59 | 31.48 | 30.50 |
| Utilities | 2.89 | 2.63 | 4.55 |
| Sectoral overlap | 81.83 | 80.94 | 77.51 |
| Portfolio combinations | HDFC flexi cap & Nifty 500 | Kotak flexi & Nifty 50 | Parag Parikh Flexi Cap & Nifty 100 |
| Weighted portfolio overlap | 41.37 | 47.92 | 37.57 |
| Top 10 stocks overlap | 12.23 | 23.32 | 14.29 |
| Sectoral overlap | 81.83 | 80.94 | 77.51 |
Source: ACE MF
What percentage of weighted portfolio overlap between an index fund and a flexi-cap fund should be considered?
For investors, there is no standard framework for overlap between the funds in the portfolio.
“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,” added Harichandan.
“When it comes to holding between an index fund and a flexi-cap fund, it can create a major overlap between the funds, as most of the flexi-cap funds own more than 60 to 65% of their portfolio towards large caps, with a category average of 52%, and many of these stocks also are major constituents of large-cap indices such as the Nifty 50. Therefore, simply adding a flexi-cap fund to an index fund may not provide diversification,” recommended Harichandan.
Investing beyond large-cap indices with broad-based index funds like the Nifty 500 may reduce the overlap, but the fundamental challenge with passive investing remains, such as no alpha generation, limited flexibility to respond to changing market conditions, and dependency on predefined index rules rather than active stock selection. Therefore, for investors, lower overlap does not mean better diversification or superior risk-adjusted returns.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
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