DSP MF launches India’s first passive Flexi Cap fund: Here's what differentiates it from active fund

The index picks 30 high-quality stocks — 10 each from the Nifty 100 (large-cap), Nifty Midcap 150, and Nifty Smallcap 250 — based on quality factors such as return on equity. Only the top-quality companies from each segment are included. The allocation is based on relative momentum between the SMID (mid and small caps) and large caps. If mid- and small-caps are showing stronger momentum than large caps, the index shifts to 67% in SMIDs and 33% in large-caps. If not, the reverse happens.

Further, the index compares the ratio of the Nifty MidSmallcap 400 to the Nifty 100 index against its 200-day moving average. If the 200-day moving average of the ratio between mid- and small-cap indices and large-cap indices is above average, the fund increases its exposure to mid- and small-caps up to two-thirds. If it is below, it reduces that exposure and tilts the portfolio two-thirds toward large caps.

Market cap allocation is reviewed quarterly. The index rebalances every quarter based on momentum signals, and the entire portfolio is reconstituted twice a year in June and December. Within each segment (large, mid, and small cap), the selected stocks are equally weighted, though the overall weight of each segment varies depending on the momentum signal.

What makes it a ‘true’ flexi-cap

“Most active flexicap funds stay between 22 to 38 percent in small and mid-caps. They’re effectively large-cap funds in disguise,” said Sahil Kapoor, Head – Products & Market Strategist at DSP Mutual Fund. “In contrast, our model responds to market trends with a clear formula. The passive strategy we’ve created will go as high as 66.66 percent in small and mid-cap stocks when there is an opportune time. It will behave like a true flexi-cap,” he added.

He added that all rebalancing happens within the index, helping investors avoid capital gains taxes typically incurred during portfolio reshuffling. “In an active fund, when you rebalance, you pay taxes. With this strategy, rebalancing happens inside the index,” Kapoor said.

How returns compare

Over the past one-year period, active Flexi Cap category delivered a return of 1.98 percent. Over three years, Flexi Cap funds posted an annualised return of 16.13 percent. Over five years, active Flexi Cap funds returned 19.67 percent annually. Over a 10-year period, the category delivered 12.45 percent.

According to DSP, the Nifty500 Flexicap Quality 30 TRI delivered median one-year rolling returns of 15 percent between October 1, 2009, and June 30, 2025. Over three-year rolling periods, the index delivered a median return of 18 percent, and over five-year rolling periods, the median return stood at 19 percent.

For longer horizons, the seven-year and ten-year rolling returns were also strong, both recording median returns of 18 percent and 19 percent respectively. In comparison, the Nifty 500 TRI posted slightly lower median returns in the same periods, ranging between 11 percent and 14 percent.

Why launch now?
Kalpen Parekh, MD and CEO of DSP Mutual Fund, said the timing of the launch is intentional, aligning with the firm’s long-standing belief in counter-cyclical product design.

“Investing is cyclical. Markets are cyclical. Returns are also cyclical. But investor behaviour, unfortunately, is pro-cyclical,” he said. “We like what has done very well in the last three years which often means we are unintentionally buying what is unlikely to do well over the next three,” he added.

DSP is urging investors to use SIPs instead of lumpsum investments in this fund, particularly in the current high-valuation environment.

“When you invest at market highs, the odds in the next few years are probably sideways or downward-trending. In sideways and falling markets, the best mechanism that works is SIP,” said Parekh adding that at market lows, lumpsum works well. At market highs, SIP and asset allocation work better.”

A fund for all seasons

According to DSP, this fund is intended to be a “fund for life.” It is designed to navigate market cap cycles without requiring investors to time their entries or exits. By building quality exposure across market caps and letting the index handle the allocation shifts, the fund aims to simplify long-term investing.

“This is a flexi-cap index fund with a quality filter, designed to behave dynamically and counter-cyclically,” Parekh said. “Quality helps with business longevity. SIPs help manage valuations. And the design removes the need for investor intervention,” he added.

Active versus passive

DSP Mutual Fund claims its new passive FlexiCap strategy outperforms all active peers across categories, including their own. The fund house clarified it isn't selling performance, but offering a disciplined, rules-based alternative suitable for all investor types. Kapoor clarified that it is not being offered as a replacement to their active fund. “Different investors prefer different styles, some opt for active, some passive, and many use both,” he noted.

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