Your "Basket" Strategy in Investing: How to add an active and passive fund to your portfolio as a part of your investment strategy

A “basket strategy” is a way to invest by adding two types of funds in your portfolio. First, you invest in an actively managed scheme (for example a focused equity fund).

Second, you invest in an index fund following broad market. This fund tracks a large market index such as the Nifty 50 or BSE 100. Its objective is to try to mirror the returns of the index it tracks, instead of outperforming it.

Now, by adding both types of funds to your portfolio, you can try to create a “basket” of investments. The focused fund aims to benefit from active investment decisions taken by the Fund Manager. Whereas the Broad market index fund seeks to spread your money across different companies forming part of the index (as per the “composition” of the tracked index), which may potentially reduce portfolio concentration among selective companies.

Want to understand this strategy in detail? Read this article to first learn the index fund and focused fund meaning and then see how to add them together for your basket strategy in 2026.

Table of Content

What is a Focused Mutual Fund?

A focused fund can invest in up to 30 equity stocks only. As per SEBI rules, it cannot hold more than 30 companies in its portfolio. Usually, these stocks are “hand-picked” based on detailed analysis and conviction of the fund manager.

Moreover, at least 65% of the fund’s total money must be invested in equity and equity-related instruments. Also, the fund must state its “investment focus”. For example, it may focus on:

Large-cap companies
Mid-cap companies
Small cap Companies
Multi-cap.

As an investor, you can find this information in the “Scheme Information Document (SID)” of any particular scheme. Now, since the portfolio is “concentrated”, returns may be potentially better only when the scheme’s investments perform well. However, the fund performance may be worse when the scheme’s investment do not perform as expected. At the same time, you are also exposed to a very high risk, because fewer stocks mean less diversification.

Need more clarity? Let’s check out its primary features:

Feature	Meaning
Return Potential	Concentrated investments in selected stocks may lead to potential gains if those stocks outperform.
Very High Risk	Due to a maximum cap of 30 Equity stocks, fluctuations in even a “single stock” can influence the NAV (Net Asset Value) of a focused equity fund.
Free-Hand Allocations	Without restrictions, the fund can invest in: Large-cap, mid-cap, and small-cap companies in case of Multi-cap Focused funds. Multiple asset classes (out of which minimum 65% should be in equity, and balance in debt, InvIT and for liquidity purposes, etc) Different themes/ sectors (say banking, pharma, and more).

What is an Index Fund?

An index fund tries to replicate/ track the performance of a stock market index, (eg. Nifty 50 or BSE 100). For those unaware, an index is a group of selected companies that represent a part of the market. For example:

The Nifty 50 includes the top 50 companies (in terms of full market capitalisation) on NSE.
The BSE 100 includes the top 100 companies (again, based on market capitalisation) on BSE.

Now, an index fund following Nifty 50 Index invests in all the companies in the same proportion as the index. If a company has a higher weight in the index, the fund invests more in it. The impact? As a result, index fund returns are usually close to the return of the index, after deducting expenses and subject to minor differences (called tracking error).

Always remember that an index fund does not try to beat the market. Its goal is only to try to match the market’s performance. For more clarity, let’s check out some of its key features:

Feature	Meaning
Passive Management	The fund manager does not select stocks based on research or predictions. The fund just tries to replicate the index.
Low Cost	Since there is no active stock selection, management costs are lower compared to actively managed funds.
Diversification	The fund invests in different companies included in the index. (eg Nifty 50 Index or BSE 100 index) This aims to reduce concentration compared to investing in a few stocks.
Liquidity	Investors can buy or redeem units on any business day at the prevailing NAV.

How to add a Focused Equity Fund with an Index Fund? The 4-Step “Basket Strategy” for your investment in 2026!

Now, since you know the meaning of both these financial products, it is time to understand how to add them in your portfolio. The Basket Strategy is about adding a focused equity fund with a broad market index fund to your portfolio. But how?

Pick the focused fund and the index fund as per scheme characteristics and your goals. and
Decide the % allocation between the two based on your risk tolerance.

Now realise that adding these funds is not a “one-time activity”. You must review the portfolio at regular intervals and rebalance it. Want to learn in detail? Follow these four steps to prepare your own basket strategy in 2026:

Step I: Select the Focused Fund

The first step is to choose a focused equity fund. You may shortlist some schemes based on CAGR (Compounded Annual Growth Rate) for relatively longer periods of time (say last 5 or 10 years.) However you must understand that, past returns are not an indicator of future performance. Past returns may or may not occur in future. You may also consider the below factors before further filtering out the schemes:

Parameter	Meaning	Importance	How to Read It
Rolling Returns	Shows fund returns over many overlapping time periods (for example, every 1-year period over the last 5 years).	You can try to see consistency and not just “one-time performance”.	If the fund beats its benchmark in most periods, it shows relatively stable performance.
Sharpe Ratio	Measures return earned for the level of risk taken.	Tells you whether the fund is rewarding you enough for the risk.	A higher Sharpe ratio could be preferred. It means a better return per unit of risk.
Standard Deviation	Shows how much the fund’s returns fluctuate.	Measures volatility (price fluctuation).	A lower value means less fluctuation and may be considered.
Alpha	Extra return generated over the benchmark index.	Shows the fund manager’s ability to “add value”.	Positive alpha is good. It means the fund outperformed its benchmark.
Expense Ratio	Annual cost charged by the fund.	Higher cost reduces your net return.	A lower expense ratio is preferable, particularly for long-term investing.
Downside Capture Ratio	Shows how much the fund falls when the market falls.	Tells how much your investment may decrease in value when the market declines.	Lower than 100% is usually better. It means the fund falls less than the market in downturns.
Upside Capture Ratio	Shows how much the fund rises when the market rises.	Indicates “growth participation” and tells how much your investment may increase in value when the market rises.	Higher than 100% may be good. It means the fund gains more than the market in up moves.

Step II: Add an Index Fund

To complete this strategy for your portfolio , now you may pick an index fund following the broad market. Apart from the common parameters checked while selecting a focused equity fund (as explained above), you can additionally analyse the following parameters when selecting an index fund:

Parameter	Meaning	Importance	How to Read It
Tracking Error	The difference between the index fund’s return and the actual index return.	Shows how closely the fund follows its benchmark.	Lower tracking error may be preferred. It indicates that the fund closely matches the index.
AUM (Assets Under Management)	Total money managed by the fund.	Higher AUM may mean that diverse investors have invested their funds in the scheme.	Higher AUM is generally preferred. However, it should not compromise tracking quality.
Replication Method	How the fund copies the index (full replication).	Full replication usually tracks more closely.	You may prefer funds that invest in all the stocks in the same proportion.

Step III: Decide the Allocation Percentage

Next, you have to decide how much money to invest in each fund. As per general industry understanding, focused equity funds are usually more volatile than broad market index funds. Therefore, many experts suggest allocating a larger portion of the portfolio to index funds to better control risk.

However, this split entirely depends on your risk appetite and financial objectives. If you are a conservative investor and do not prefer high concentration, you may keep a higher percentage in the index fund (say 70 to 80%). In contrast, if you are comfortable with market fluctuations, you may increase the focused fund portion.

Step IV: Timely Rebalance Your Portfolio

Gradually, market movements may change the original allocation. For example,

Let’s say you initially decided to invest:
- 80% in a broad market index fund and
The balance 20% in a focused equity fund.
But due to market fluctuations, the share of the focused fund increased above 30%.
Now, you must “rebalance” to restore your original ratio.

As an investor, you may review your portfolio at least once a year.

Your "Basket" Strategy in Investing: How to add an active and passive fund to your portfolio as a part of your investment strategy

Managing Volatility: How Tata’s Mutual Fund Manager Navigates 2026’s Ups and Downs

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Your "Basket" Strategy in Investing: How to add an active and passive fund to your portfolio as a part of your investment strategy

Managing Volatility: How Tata’s Mutual Fund Manager Navigates 2026’s Ups and Downs

Get closer to your financial goals

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Connect

Company

Statutory Disclosures

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