Already invested in flexi-cap? Avoid these 3 categories when adding more funds to limit portfolio overlap

With a flexi-cap fund making up 50% of your portfolio, adding another equity fund category may bring more overlap.

Investors often add another mutual fund believing they are increasing diversification. But if the new fund holds many of the same stocks as an existing flexi-cap fund, the portfolio may become bigger without becoming meaningfully different.

The September 2026 report of DSP Mutual Fund titled “NETRA - Early Signals Through Charts” highlights this potential overlap across equity fund categories.

It finds that only 25% to 36% of the equity exposure is genuinely different when another category is compared with the average flexi-cap equity portfolio.

The report’s message is straightforward. “You may own more of the same than you think. You need less”.

Which categories overlap the most with flexi-cap funds?

Consider a simple ₹100 portfolio. An investor puts ₹50 into a flexi-cap fund and the remaining ₹50 into another category.

Among the categories highlighted, Balanced Advantage Funds (BAFs) show the highest overlap. BAFs are hybrid funds that can dynamically manage their allocation between equity and other assets.

If the additional ₹50 is invested in a BAF, 75.3% of its equity exposure is already represented through the flexi-cap portfolio. Only 24.7% is different exposure.

For large & mid-cap funds, 71.5% of the equity exposure is already present, while just 28.5% is different.

The overlap is somewhat lower for large-cap funds. However, even here, 63.8% of the equity exposure is already present, leaving only 36.2% as genuinely different exposure.

For example, if the ₹50 allocation to another category has ₹40 of equity exposure, the overlap calculation applies to that ₹40, not the entire ₹50. This is particularly relevant for BAFs because they can also hold debt and other assets.

“Already present” therefore represents the share of the equity exposure in the added category that is already represented through the flexi-cap portfolio, based on portfolio weights.

This allows the comparison to focus specifically on the equity portion of the portfolios.

Does adding more fund categories always improve diversification?

Not necessarily. The report compares four categories, creating six possible pairwise combinations:

• Flexicap–Balanced Advantage
• Flexicap–Large & Mid Cap
• Flexicap–Large Cap
• Balanced Advantage–Large & Mid Cap
• Balanced Advantage–Large Cap
• Large & Mid Cap–Large Cap

Across these six combinations, 53% to 76% of equity exposure is common between the two categories.

The three flexi-cap comparisons illustrate how significant that overlap can be. 75.3% with BAFs, 71.5% with large & mid-cap, and 63.8% with large-cap.

The broader point is that category labels alone cannot tell investors how diversified their portfolios really are.

What does this mean for investors?

If an investor wants to invest ₹100 in an equity portfolio, with ₹50 already allocated to a flexi-cap fund, adding another ₹50 to a large-cap, large & mid-cap, or balanced advantage fund may not provide as much new equity exposure as expected.

Instead of simply adding another category, investors may need to look at the underlying holdings and identify how much of the new fund is genuinely different from what they already own.

Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.