At first glance, holding both flexi-cap and large & mid-cap mutual funds may look like duplication. In practice, the answer is more nuanced; the combination can either improve diversification or quietly concentrate risk, depending on how the portfolio is constructed.
How the two categories differ
Flexi-cap funds are structurally unconstrained. They can shift allocations across large-, mid- and small-cap stocks depending on market conditions and fund manager strategy. By contrast, large & mid-cap funds operate under a tighter mandate– at least 35 per cent each in large- and mid-cap stocks.
Historical trends suggest that flexi-cap funds tend to lean towards large caps—often around 60 per cent—while maintaining relatively lower mid-cap exposure. This creates a different allocation profile compared to large & mid-cap funds, which are compelled to maintain meaningful mid-cap exposure.
Manish Srivastava, executive director at Anand Rathi Wealth Limited, notes that this distinction can actually work in favour of diversification rather than against it. A combination of both categories “can help provide a more controlled market cap allocation at the overall portfolio level”, provided investors actively review exposures.
Overlap: a risk, but not always significant
The concern around overlap is valid, but often overstated. Even funds within similar categories may not hold identical stocks. For instance, two schemes from the same fund house may share only a limited number of common holdings.
Srivastava points out that some flexi-cap and large & mid-cap fund combinations show overlap of about 20 per cent, which is not large enough to materially dilute diversification—especially in portfolios that also include other categories such as small-cap or multi-cap funds.
Nilesh D Naik, head of investment products at Share.Market (PhonePe Wealth), adds that diversification is less about the number of funds and more about their underlying strategy. “An investor typically needs three to four actively managed funds to achieve the desired level of diversification,” he says, adding that including one fund from each of these categories is reasonable if they follow different investment styles.
The AMC concentration problem
A more subtle risk arises when investors choose multiple funds from the same asset management company (AMC). Fund houses often follow a consistent investment philosophy, such as value, growth, or momentum, which can lead to similar stock selection across schemes.
This creates two layers of concentration:
· Portfolio similarity risk: Funds may behave similarly across market cycles
· AMC risk: Any regulatory or operational issue affecting the AMC could impact multiple investments
Srivastava recommends limiting exposure to a single AMC to about 25–30 per cent of the overall portfolio. Naik also suggests diversifying across fund managers to reduce the chances of style overlap.
How to check for overlap
For retail investors, identifying overlap requires more than a quick glance at fund names. A structured approach includes:
· Reviewing factsheets: These disclose holdings, sector allocation and market-cap exposure
· Comparing stock-level holdings: Look for common stocks across funds
· Assessing investment style: Funds with similar styles are more likely to overlap
Naik points to tools that analyse portfolio characteristics, such as consistency, risk and investment style, to help investors evaluate whether funds are truly differentiated.
Because flexi-cap funds can dynamically change allocation, this exercise should not be one-time. Annual reviews are essential to keep the portfolio aligned with the intended diversification.
Should you exit one fund?
Owning both categories is not inherently problematic. The decision to exit should be driven by measurable overlap and concentration.
· If overlap exceeds roughly 25 per cent, or
· If AMC exposure crosses 30 per cent
then switching one fund, preferably to a different AMC or strategy, may be warranted.
Naik emphasises that exits should not be mechanical. Investors must consider exit loads and tax implications before making changes. If the two funds follow distinct strategies, there may be no need to alter the portfolio at all.
Which category suits long-term investing?
There is no single “winner” between the two. Both serve a role in long-term portfolios.
Flexi-cap funds, however, offer a structural advantage: flexibility. They allow fund managers to adjust allocations dynamically across market cycles, which can be valuable during periods of volatility. Harsh Gupta Madhusudan, fund manager at Ionic Asset, notes that this adaptability makes flexi-cap funds particularly relevant over long horizons.
Large & mid-cap funds bring discipline by ensuring consistent exposure to mid-cap stocks, which can drive growth over time.
Constructing a coherent portfolio
The debate is less about choosing one category over the other and more about constructing a coherent portfolio. A well-diversified portfolio typically combines multiple categories and investment styles, with a broad allocation such as:
· 50–55 per cent in large caps
· 20–25 per cent in mid caps
· The remainder in small caps
Used thoughtfully, flexi-cap and large & mid-cap funds can complement each other rather than compete. The key lies in monitoring overlap, diversifying across AMCs, and maintaining clarity on overall asset allocation.