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To diversify an Indian equity portfolio, assess all your direct shares and the underlying holdings of your mutual funds and index funds together. Check exposure across sectors and large-, mid- and small-cap companies, then look for duplicated holdings or unintended concentration. There is no universally appropriate allocation: the right mix depends on your goals, time horizon, risk capacity and existing investments.
Start with the whole portfolio, not the number of funds
Owning several funds does not necessarily mean you are diversified. Funds can hold many of the same companies or cluster in similar sectors, so adding another scheme may increase duplication rather than broaden exposure. SEBI distinguishes diversified schemes that span sectors or market capitalizations from focused sectoral and thematic schemes, which lack diversification across industries (SEBI scheme disclosure, July 2025).
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Include direct stocks and look-through holdings from every equity fund in your review. Where holdings information is available, group them by sector and by market-cap segment. This shows the exposures you actually own rather than relying on fund names or the count of schemes.
Understand India’s large-, mid- and small-cap labels
SEBI’s definitions rank companies by full market capitalization; they are not fixed rupee thresholds. Mutual funds use the list prepared by AMFI, and the rankings can change over time. Check the current list a fund uses when assessing its exposure.
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| Segment | Company rank by full market capitalization |
|---|---|
| Large-cap | 1–100 |
| Mid-cap | 101–250 |
| Small-cap | 251 onward |
These definitions are reproduced in SEBI scheme material. A company’s category can shift as market-cap rankings change, so a past label should not be treated as permanent.
Know what different fund mandates do
Broad index funds
An index fund seeks to mirror a specified index, such as the Nifty 50, and gives exposure to the basket and weights defined by that index. A single fund can therefore provide exposure to multiple stocks, but its breadth depends on the index it tracks. Costs and tracking error can cause returns to differ from the index; neither index exposure nor diversification removes market risk. Compare the index, expense ratio and tracking error (SEBI, Index Mutual Funds).
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Diversified equity schemes
These schemes may spread holdings across industries or market-cap segments, but their actual exposure depends on the scheme’s mandate and portfolio. Review the holdings rather than assuming a category name guarantees broad exposure.
Multi-cap funds
Under SEBI’s circular dated February 26, 2026, a multi-cap fund must invest at least 75% of total assets in equity and equity-related instruments, including at least 25% of total assets in each of large-, mid- and small-cap companies (SEBI circular). These are fund-category minimums, not a recommended personal allocation.
Sectoral and thematic funds
These schemes focus on a sector, industry or theme. SEBI cautions that they carry higher risk because they lack diversification across industries (SEBI, Thematic/Sectoral Mutual Funds). A broad fund combined with several focused funds can still leave a portfolio heavily dependent on a small set of sectors.
Use sector data as context, not as a target
SEBI’s equity-fund deployment report for May 2025 reported banks at 20.91% and software at 5.21% of equity-fund assets under management (SEBI monthly report). These are figures from that report’s dated snapshot, not recommended weights and not a description of every investor’s portfolio. They illustrate why looking through fund holdings can reveal sector exposure that is easy to miss when reviewing schemes one by one.
A practical portfolio review sequence
- Inventory your equity exposure. List every direct share and equity mutual fund or index fund you hold.
- Look through the funds. Use available scheme holdings or index composition to identify underlying companies; group them by sector and by large-, mid- and small-cap segment.
- Check for duplication. Note when multiple funds hold the same large companies or similar sector exposures. Fund count alone is not a measure of diversification.
- Separate broad exposure from deliberate concentration. Identify any sectoral or thematic positions and consider how much the portfolio depends on those sectors performing well.
- Compare scheme design and costs. Check each fund’s mandate, underlying index or holdings, and relevant costs. For index funds, include tracking error in the comparison.
- Review when circumstances change. Reassess when your goals, ability to tolerate losses or holdings change. The appropriate mix is personal; the category rules do not set a required portfolio allocation or rebalancing schedule.
How to judge whether the mix is diversified enough
There is no allocation that can be recommended for every investor from market-cap labels or sector averages alone. Instead, ask whether your combined holdings match the role you want equities to play, whether a small number of companies or sectors dominate, and whether each fund adds exposure you intend to own. A category label is not a guarantee of lower losses or better returns.
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