- Why Are These Two Funds So Different?
- What's Driving the Portfolio Gap?
- How Do They Actually Compare?
- Does Combining Both Actually Work?
- Things to Keep in Mind
- The Bottom Line
Value funds and flexi-cap funds share the same benchmark, Nifty 500 TRI, and technically draw from the same pool of stocks. Yet on average, only about 33% of their portfolios overlap. Two out of every three stocks in a value fund won't even appear in a typical flexi cap fund.
This blog explains why that gap exists, what it means for your portfolio, and whether holding both actually makes sense.
Why Are These Two Funds So Different?
Both categories invest in Indian equities. Both can pick from the same 500+ stocks. But SEBI has given them completely different mandates.
A value fund must follow a value investing strategy; it looks for stocks trading below their intrinsic value (what the company is actually worth). As per SEBI's February 2026 circular, value funds must now keep at least 80% of their portfolio in equity, up from 65% earlier. This makes them more "pure" in their approach.
A flexi cap fund has no style restriction. It just needs a minimum 65% in equity, and the fund manager can invest across large, mid, and small-cap companies in any proportion, in any sector, at any time.
Same benchmark. Very different playbook.
What's Driving the Portfolio Gap?
1. They hunt in completely different places
Value funds go looking for stocks that the market has ignored, punished, or forgotten, typically in sectors like PSU banks, metals, capital goods, and cyclicals when they are out of favour. Flexi-cap funds, by contrast, go where the growth is, typically financials, IT, and consumption-driven companies at any given time.
This sector-level difference alone explains most of the overlap gap.
2. Value funds go where most flexi caps won't
A flexi cap manager isn't obligated to hold a beaten-down stock. A value fund manager specifically looks for beaten-down stocks; that's the entire point. This means value funds regularly hold companies that are either too cheap, too boring, or too controversial for a growth-oriented flexi cap manager to justify.
3. A key exception to watch
Not all flexi cap funds are growth-oriented. Some, like Parag Parikh Flexi Cap, follow an explicitly value-centric approach. During the recent market correction (Sep 2024 to Feb 2025), when the flexi cap category fell an average of 14%, Parag Parikh Flexi Cap fell around 5%. That resilience came directly from its value tilt. If your flexi cap fund behaves this way, adding a separate value fund will create significant duplication, not diversification.
How Do They Actually Compare?
| Parameter | Value Fund | Flexi Cap Fund |
| SEBI mandate | Value investing strategy, min 80% equity | No style restriction, min 65% equity |
| Stock selection approach | Stocks trading below intrinsic value | Growth stocks across all market caps |
| Benchmark | Nifty 500 TRI | Nifty 500 TRI |
| Typical sector bias | PSUs, cyclicals, beaten-down sectors | Financials, IT, consumption |
| Downside cushion | Higher margin of safety built in | Varies significantly by fund manager |
Does Combining Both Actually Work?
Yes, but only because they tend to do well in different market environments.
Value funds typically outperform when cheap sectors re-rate, when markets correct from high valuations, or when beaten-down companies finally get recognised. Flexi-cap funds tend to outperform during strong bull runs, when the manager's freedom to ride mid and small-cap momentum pays off.
Over the long run, the flexi cap category has delivered average returns of around 13.75% over 5 years and 14.75% over 10 years. Value funds don't always match these numbers during bull markets, but they tend to protect capital better when markets fall.
This cycle difference is the real reason combining both can work. One fills in where the other falls short.
Things to Keep in Mind
- Check overlap before combining. If your flexi cap already has a value tilt, adding a value fund creates duplication. If overlap is above 50–60%, the combination adds little diversification benefit.
- Value funds can underperform for years. When markets are in momentum mode and expensive growth stocks are running, value funds lag. This isn't a red flag; it's how the category is designed. Investors who exit during these phases miss the point entirely.
- Not all value funds are equally "value." The label doesn't guarantee the portfolio. Some funds use the term loosely. Always look at the actual top holdings and sector weights in the monthly fact sheet before investing.
- SEBI's Feb 2026 update tightened the definition. The equity floor for value funds moved to 80%, making them stricter about their mandate. This is good for investors who want category purity, but it also means less room to manoeuvre during volatile periods.
- Flexi cap returns are heavily manager-dependent. The mandate is wide open, which means two flexi-cap funds can behave very differently. A flexi cap fund that consistently holds 70%+ in large caps will feel nothing like one that aggressively chases small caps.
The Bottom Line
Value funds and flexi-cap funds are genuinely different products despite sharing the same benchmark, and that difference is exactly what makes them work together in a portfolio. If your flexi cap fund doesn't follow a value approach, combining it with a value fund gives you real diversification across market cycles, not just across fund names.
But run the overlap check first. One value-tilted flexi cap in your portfolio can quietly undo the entire diversification logic, and most investors never notice until they look at the actual holdings.
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