Flexi-cap or large & mid-cap? The overlap may surprise you

Summary: You hold a flexi-cap and a large & mid-cap fund from the same AMC. You think you're diversified. Sixteen out of 31 fund pairs we tested shared more than half their portfolios. The diversification may not exist.

More often than not, a large & mid-cap fund and a flexi-cap fund from the same AMC hold many of the same stocks. If you hold both, thinking you are diversifying, you may simply be doubling up.

To see how deep the overlap runs, we put the numbers to the test. First, though, a quick look at how the two categories are built because it sets up everything that follows.

How the two categories are built

SEBI, India's markets regulator, sets the rules for both. And the mandates differ in important ways.

Flexi-cap funds must invest at least 65 per cent in equities, with complete freedom to allocate across large, mid, and small-cap stocks in any proportion. Large & mid-cap funds, referred to as L&M funds, must invest at least 35 per cent each in large-cap and mid-cap stocks, leaving the remaining 30 per cent to the fund manager's discretion.

In terms of scale, flexi-cap funds are the larger category with 45 funds managing Rs 5,07,090 crore as of March 31, 2026. L&M funds are a smaller universe comprising 33 funds with a combined AUM, or assets under management, of Rs 2,99,876 crore.

Despite the different mandates, both categories end up investing heavily in the same stocks. Here is how their average portfolio allocations have looked over the past three years:

Flexi-cap funds park nearly two-thirds of their money in large caps. L&M funds, driven by their mandate, allocate significantly more to mid caps, nearly 39 per cent on average. Both categories put the bulk of their money in large and mid-caps, around 83 per cent for flexi-cap funds and 88 per cent for L&M funds. 

The similar allocation is what sets up the overlap problem.

The overlap problem

We compared L&M funds with at least one year of history against their flexi-cap counterpart from the same fund house. We ended up with 31 such pairs in total.

Only one fund pair had an overlap below 20 per cent. Sixteen out of 31 showed high to very high overlap, meaning more than half the pairs shared a substantial portion of their portfolios.

How the overlap affects you

In plain terms, if you hold both a flexi-cap and an L&M fund from the same fund house, there is a good chance you are holding many of the same stocks twice without the diversification you think you have.

But overlap is not the whole story. The two categories do behave differently when it comes to returns and risk. And that difference is worth understanding before you choose between them.

We compared flexi-cap and L&M fund pairs from the same fund houses across calendar years from 2021 to 2026. From 2021 to 2024, L&M funds had the upper hand, with a majority beating their flexi-cap sibling each year. 2021 was the strongest, with 15 out of 19 L&M funds winning at an average outperformance of 7.6 per cent. Their higher mid-cap allocation worked in their favour during those years.

Then came 2025. Flexi-cap funds took the lead, with 18 out of 31 funds beating their L&M counterparts. When large caps held up better than mid caps, the flexi-cap's heavier large-cap tilt paid off.

Neither category dominates in all conditions. Which one leads depends largely on whether large caps or mid caps are having a better run.

On the downside, the difference is narrow. We looked at how both categories performed during the five worst monthly declines of the Nifty 500 TRI, a broad index tracking the total returns of India's 500 largest listed companies, since 2016.

L&M funds fell slightly more than flexi-cap funds in each downturn. This is not surprising given their higher mid-cap exposure, which tends to be more volatile. But the gap is narrow. L&M funds do not carry meaningfully higher downside risk compared to flexi-cap funds.

Which one should you pick?

The choice comes down to what you want from a diversified equity fund. If you prefer a fund that leans heavily on large caps with the flexibility to move where opportunities arise, a flexi-cap fund fits. If you want more mid-cap exposure built into the structure by design, L&M funds offer that.

Whichever you choose, the basics remain the same. Pick funds with a consistent long-term record rather than recent outperformers. And if you want to hold both categories, pick them from different fund houses; otherwise, you may be paying for diversification you are not actually getting.

Knowing which funds to pick and whether what you already hold is genuinely diversified is exactly what Value Research Fund Advisor is built for. Personalised, research-backed guidance so your portfolio works as hard as you think it does.

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