Despite the fund manager’s free mandate to move between market caps, flexicap tends to favour large-cap stocks.
Generally, the regular flexicap fund category’s allocation to large-caps has been in the range of 62-78%, with less allocation to mid- and small-cap stocks. Parag Parikh Flexicap Fund’s allocation to large-cap stocks stood at 62% as of 31 July 2025, while HDFC Flexicap’s large-cap allocation stood at 84%, according to Value Research. The regular flexicap fund of DSP Mutual Fund—the fund house that has now launched the passive flexicap fund—had 58% allocation to large-caps as of 31 July 2025.
Here is the gap that a passively managed flexicap fund can look to fill. A passively managed fund follows a set of pre-defined rules rather than active stock-picking by a manager.
DSP MF’s newly launched fund is the first passively managed rule-based fund in the ₹4.93 trillion flexicap category, which is dominated by actively managed funds. The Nifty 500 Flexicap Quality 30 Index Fund tracks an index that combines both momentum and quality filters.
The fund can tilt as much as 67% into mid- and small-caps when they are in “relative momentum” (performing better than large-caps). When the trend reverses, it will cut exposure to mid- and small-caps down to 33% and lean back into large-caps, per the fund house’s product note.
To avoid stocks lacking sound fundamentals, the fund will pick stocks from quality-factor indices to weed out firms with weak balance sheets, high leverage or heavy promoter pledging. “Pure momentum can at times lead to stocks with relatively lower quality. Hence, the quality filter helps to avoid such companies,” explained Anil Ghelani, head of passive investments and products at DSP MF.
Flexicap funds—which are benchmarked against the Nifty 500 Index— have the freedom to invest across categories, but their median allocation to mid- and small-caps has been in the range of 22–38%, even in phases when these segments strongly outperformed, an analysis by DSP MF shows. The new fund is claimed to be a “true-to-label” flexicap, with mid- and small-cap allocations designed to switch between 33% and 67% depending on market cycles.
“The fund’s back-tested data shows promise. A mix of momentum factor and quality filter can play out well over the longer term,” said Kavitha Menon, founder of wealth advisory firm Probitus Wealth.
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The Nifty 500 Flexicap Quality 30 Total Return Index (TRI) has delivered average rolling returns of close to 19% over three-year and five-year periods against the Nifty 500 TRI’s returns of about 13% in both the time series. The above returns were rolled daily between 1 October 2009 and 30 June 2025, DSP data showed.
The returns data are backtested as historical index data is created by the National Stock Exchange (NSE) for all indices. TRI captures both capital appreciation from price movement and dividend gains from stocks.
SIPs preferred
Experts say SIPs (systematic investment plans) should be the preferred route to invest in this fund. Markets are cyclical: small—and mid-caps often experience long stretches of outperformance followed by sharp underperformance. An SIP strategy will let investors gradually build their portfolio and even benefit from phases of volatility.
“Through SIPs, investors can ride the market cycle and also take advantage of rupee-cost averaging. For example, right now the fund’s rules make it overweight (67% allocation) on mid- and small-caps, but valuations in these segments may appear stretched,” according to Ghelani.
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The downsides
“It will be a concentrated fund, which can lead to higher volatility in certain phases of markets. As a rule-based passive fund, it may miss out on a fund manager’s stock-picking ability to identify stocks with earning potential even in flat markets,” said Ravi Kumar TV, founder of Gaining Ground Investment Services.
If market conditions shift abruptly in the middle of a quarter, the fund may lag in adjusting allocations. For instance, the fund may not be able to quickly respond to a market crash and shift its weightages;, until the next quarterly scheduled rebalance. Similarly, the strategy may sometimes capture short-lived trends.
For example, between April and June 2016, the Nifty 500 Flexicap Quality 30 Index went overweight on large-cap (i.e. 67% for three months) as the Nifty 400 to Nifty 100 ratio briefly fell below its 200 daily moving average.
Another point to note is that the momentum-based strategy might lead to more frequent buying and selling of stocks, meaning higher portfolio churn compared to traditional index funds.
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Should you invest
It is true that actively managed flexicap funds tend to be large-cap biased, but still, there are plenty of funds in the flexicap space that have delivered healthy returns.
The passive fund will use a quality filter to limit downside when markets fall, and use momentum strategy to ride the mid- and small-cap rally. But in practice, can it beat actively managed funds on a consistent basis? A rule-based passive fund offers a low-cost alternative (0.3% total expense ratio versus 0.43%-1.35% in active flexicap funds), adding to the fund’s appeal.
However, since it is a new and untested concept in the Indian market, financial advisers suggest a cautious approach. It may be wise to let the fund build a performance history of a few years before considering it as a holding in your investment portfolio.
