Investors often believe owning more mutual fund schemes ensures safety, but recent data shows a high overlap between flexi-cap and other fund categories. This concentration can negate the benefits of diversification and lead to paying unnecessary expense ratios. Understanding your underlying asset allocation is essential for building a truly resilient portfolio.
Many investors believe that the more mutual fund schemes they hold, the better their diversification. However, recent analysis from DSP Mutual Fund’s September 2026 'Netra' report challenges this common assumption. The findings suggest that many portfolios are not as diversified as they seem, with significant commonality in underlying stock holdings across different fund categories.
The Reality of Fund Redundancy
The report indicates that flexi-cap funds, which have the freedom to invest across market capitalizations, often hold the same blue-chip stocks as other specialized categories. This leads to a high degree of overlap. For instance, when an investor combines a flexi-cap fund with a Balanced Advantage Fund (BAF), there is a 75.3% common equity exposure. Similarly, comparing flexi-cap portfolios to large and mid-cap funds reveals a 71.5% overlap, while large-cap funds share 63.8% of their holdings with flexi-cap schemes.
In practical terms, this means that for many investors, only 25% to 36% of their equity exposure is genuinely distinct across these combinations. While having some overlap is normal in equity markets where certain high-quality companies are popular among fund managers, excessive duplication effectively concentrates the risk rather than spreading it.
Why Flexi-Cap Funds Cause Overlap
Flexi-cap funds are designed to be agile, allowing managers to shift investments between large, mid, and small-cap stocks depending on market conditions. Because these managers are often looking for the strongest companies to drive returns, they frequently gravitate toward the same dominant blue-chip stocks that large-cap and hybrid funds already hold.
While this strategy provides managers with flexibility, it can lead to unintentional concentration for the investor. If a specific sector or a few large stocks underperform, a portfolio that holds multiple overlapping funds will suffer more than a truly diversified one. Furthermore, investors may be paying multiple expense ratios for the same underlying strategy, which can reduce net returns over the long term.
How to Track and Manage Your Portfolio
True diversification is not about the number of schemes in your portfolio, but the specific assets they hold. To avoid the trap of redundant holdings, investors can use portfolio overlap tools available on various investment platforms and official fund house websites. Since SEBI mandates regular, transparent monthly portfolio disclosures, investors have access to the data needed to compare the underlying assets of their chosen schemes.
Before adding a new fund, it is worth checking if the new scheme brings a different investment style, sector exposure, or market-cap focus to the table. If a new fund primarily holds the same companies as your existing portfolio, it may add administrative complexity and cost without providing the intended risk-mitigation benefits. Monitoring these overlaps is a practical step toward ensuring that a portfolio is actually built for resilience rather than just volume.