To diversify an Indian equity portfolio, review both what companies do (sector exposure) and how large they are (market-cap exposure)—across your direct shares and the underlying holdings of every mutual fund or index fund you own. Multiple funds do not necessarily mean broad diversification: their holdings may overlap. There is no universal sector or market-cap allocation that suits every investor, so use your goals, time horizon, risk capacity and existing holdings to guide decisions.
What diversification across sectors and market caps means
These are two separate ways to examine the same equity portfolio. Sector analysis shows whether your money is concentrated in areas such as banking or software. Market-cap analysis shows how exposure is distributed among larger, mid-sized and smaller companies. A portfolio can span many sectors but still be dominated by large-cap shares, or include several market-cap segments while remaining concentrated in a few industries.
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Assess the portfolio as a whole, not one account or fund at a time. A diversified scheme may span different sectors or market capitalizations, while a focused sector or thematic scheme does not provide the same diversification across industries. SEBI explains the distinction in its scheme disclosure on diversified equity-oriented schemes and its guidance on thematic and sectoral mutual funds.
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How SEBI defines large-, mid- and small-cap companies
SEBI’s definitions use companies’ relative ranks by full market capitalization, rather than permanent rupee-value cutoffs:
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| Segment | Rank by full market capitalization |
|---|---|
| Large-cap | 1–100 |
| Mid-cap | 101–250 |
| Small-cap | 251 onward |
These labels can change as companies’ relative market capitalizations change. Mutual funds use the list prepared by AMFI; check the current list or a scheme’s current disclosures when assessing its holdings. The definitions are reproduced in SEBI scheme material.
Compare fund types by what they actually hold
A fund’s label is a starting point, not a guarantee of diversification or lower risk. Compare its mandate and underlying holdings with the rest of your portfolio.
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| Fund type | What to examine | Key consideration |
|---|---|---|
| Broad index fund | The specified index, its constituent stocks and their weights | It seeks to mirror a particular index, not the entire market. Costs and tracking error can cause its returns to differ from the index. SEBI’s index mutual fund guidance explains these features. |
| Active diversified equity scheme | The scheme’s stated mandate, holdings, sectors and market-cap exposure | “Diversified” does not mean its holdings will match another diversified scheme or remove equity-market risk. Review the disclosure and look for overlap. |
| Multi-cap fund | Its exposure to each official market-cap segment | Under SEBI’s February 26, 2026 categorization circular, 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. These are fund-category minimums, not a personal allocation recommendation. See the SEBI circular. |
| Sectoral or thematic fund | The named sector or theme and how it overlaps with existing holdings | Its focus increases dependence on the chosen sector or theme. SEBI warns these funds carry higher risk because they lack diversification across industries. |
Do not assume a flexi-cap fund has the same three 25% minimums as a multi-cap fund. The cited circular establishes the multi-cap requirements described above; check the current category rules and scheme documents for the terms that apply to any other fund.
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How to check your portfolio for concentration and overlap
- Make one inventory. List every direct equity holding and every equity mutual fund or index fund in the portfolio you want to review.
- Look through each fund. Use its latest available portfolio disclosure or, for an index fund, the specified index’s composition. Record the underlying companies, their sectors and their market-cap segments where available.
- Combine exposures across holdings. Identify sectors and companies that appear in multiple funds as well as direct shares. Several funds can own the same large companies or create similar sector exposure, so counting fund names alone can overstate diversification.
- Check both dimensions. Note whether exposure is concentrated in particular sectors and whether it clusters in large-, mid- or small-cap companies. Treat missing or dated holdings data as a limitation rather than assuming the fund has not changed.
- Compare broad exposure with focused positions. Decide whether a sectoral or thematic holding is an intentional, limited position in the context of your overall portfolio, rather than an unnoticed concentration created by overlapping funds.
- Compare the relevant fund details. For index funds, review the underlying index, expense ratio and tracking error. For other schemes, compare the mandate and disclosed holdings. A category name alone does not establish that a fund fits your goals or risk capacity.
- Revisit when circumstances change. Review the picture when your goals, ability to take risk or holdings change. The sources cited here do not establish a required calendar schedule for personal rebalancing.
Use sector statistics as context, not as target weights
SEBI’s monthly equity-fund deployment report for May 2025–2026 reported banks at 20.91% and software at 5.21% of equity-fund assets under management. Those figures describe reported fund deployment in that month’s table; they are not recommended portfolio weights, a current 2026 allocation, or a description of every investor’s portfolio. See the SEBI May 2025–2026 report.
Use such figures only to understand that fund exposure can be uneven across sectors. Your own sector mix depends on the shares and funds you hold and their underlying weights.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why there is no one-size-fits-all allocation
The regulatory category rules describe what certain schemes must hold; they do not determine what an individual investor should own. An appropriate mix depends on circumstances such as investment goals, time horizon, capacity for loss and current holdings. A broad index fund can still carry market risk, and adding small-cap, sectoral or thematic exposure does not automatically improve diversification. Evaluate the combined portfolio and the risks you are choosing to take rather than targeting an unsupported universal percentage.
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