Why to invest in Flexi Cap Funds?
By Akhil Chugh
Date July 10, 2021
Are you fascinated by daily news of the market hitting new highs and thinking to invest?
Are you confused about whether to invest in large-cap, mid-cap or small-caps?
Well, then Flexi Cap can be the right solution for you with the flexibility to invest across all market caps.
Let’s understand it in detail.
Understanding Flexi Cap Funds:
In November 2020, SEBI introduced a new category of equity funds – ‘Flexi Cap’ funds, demarcating them from multi-cap funds, which had been mandated in September 2020 to invest at least 25 per cent of its funds into each large, mid and small-cap stocks. As per the rule, funds in the flexi cap category need to invest a minimum of 65% of their portfolio in equity with no restriction in terms of market-cap allocation. Thus, flexi-cap funds are given complete flexibility in deciding their allocation among different market caps. A flexi-cap fund offers fund managers greater investment choices and diversification possibilities.
With flexi-cap funds, SEBI has brought back the multi-cap funds in the old avatar with a new name!
With these new rules, fund houses are given the flexibility to re-categorize their erstwhile Multi Cap schemes as Flexi Cap schemes if they wanted to continue with their old style of investment. As a result, many schemes have recategorized themselves from Multi-cap to Flexi-cap funds like Kotak, Motilal Oswal, Aditya Birla Sun Life, Parag Parikh, etc.
However, this change in name doesn’t have any impact on your existing investments. The funds have changed their scheme name and category while maintaining the same investment objective, team and process.
Among the equity mutual fund categories, Flexi Cap is the second largest. As per AMFI data, there are 25 Flexi Cap funds with over 84 lakh folios, managing assets worth Rs1.59 lakh crore.
How Flexi Cap funds work?
In Flexi Cap funds category, it is the fund manager’s responsibility to decide on the asset allocation among different market caps based on the prevailing market conditions. As there is no minimum or maximum prescribed exposure limit, the fund manager has the flexibility to go dynamically overweight/underweight across large, mid or small-cap depending on their relative attractiveness of the categories. Based on the market conditions, the fund manager can rebalance the portfolio, increasing large-cap allocation during market lows and investing more across small and mid-cap segments to harness the growth momentum.
Flexi Cap funds follow a research-driven, bottom-up investing strategy that involves more stock-picking based on quality, and less on following rigid rules for sectoral diversification. As a result of this fund’s flexible structure, investors get the dual benefit of not only investing in the best-performing stocks but also the option to exit from the unattractive ones.
Why Invest in Flexi Cap Funds?
Flexi Cap funds offer several benefits that can help investors optimise the risk-adjusted returns of investor’s portfolio.
- Return optimization:
Apart from the volatility in the overall performance of the equity market, it also displays volatility in terms of the relative performance of various segments like large-cap, mid-cap and small caps. Thus, an investor needs to tap into the potential opportunities that any specific segment of the market has to offer as a means to maximise one’s long term returns at any given point of time. Since for a layman it is very difficult to identify the potential of a specific segment, it is ideal for investors to stay invested in a product like Flexi Cap funds which can help them capitalise on any good opportunity across any market segment.
It is expected under current circumstances that market volatility may prevail in the near term given the evolving developments around the pandemic situation and global growth recovery. Barring few pockets of the market, valuations in certain pockets are still reasonable. So, investing in select opportunities with reasonable valuations across market cap may be beneficial for investors seeking wealth creation in the long term. This is where Flexi Cap funds can play a big role in optimising returns for investors.
SIP Past Performance of Top Flexi Cap funds:
2.Flexibility creates opportunity:
Since the onset of Covid pandemic, flexibility has taken on new meaning. Companies are proactively changing their processes and policies to adjust to the new normal. Work from home and virtual meetings have become the new normal. Do you think that all of this would have been possible if people and organizations were rigid? If they were not flexible enough to respond to the changing environment?
Most likely not. Flexibility equals opportunity. The only way we can benefit from new and emerging opportunities is if we are flexible enough to grab them. That is the basic premise of Flexi Cap funds.
In Flexi Cap funds, the fund manager has the flexibility to go overweight or underweight across large, mid or small-cap based on the evolving market conditions as there is no prescribed exposure restriction. Based on the relative attractiveness & prevailing conditions, the fund manager can rebalance the portfolio by increasing large-cap allocation during market lows and investing more across small and mid-cap segments to benefit from the expected growth momentum. Moreover, with the requirement to invest a minimum of 65% in domestic equity, a portion of up to 35% of the portfolio can be invested in debt or maintained in cash or cash equivalents to reap the benefit from any correction in the overall market.
3.Provides diversification:
Flexi Cap funds can offer meaningful diversification to one’s portfolio as it has the flexibility to invest across multiple assets and thus can reduce the risk of losses that stem from extreme movements in any one asset class. Further, the ability to invest in large-cap, mid-cap, and small-cap stocks means that fund managers can create an investment portfolio that provides a good mix of stability and growth. Investments can be spread across stable large-caps and high-growth mid and small-caps. Thus, reducing the overall risk of the portfolio.
4.Less risky as compared to pure mid cap & small cap funds:
During the volatility across the various market segments when the specific segment of the market is expected to do relatively better or worse than other segments, freedom to invest across the various category is a blessing for Flexi Cap category against Mid Cap and Small Cap category where they are required to invest a minimum of 65% of their capital in the companies falling in their respective category.
Sometimes when the large-cap category is expected to do better than other segments, midcap and small-cap schemes cannot perform relatively because they have to meet the requirement of investing a minimum of 65% in the companies of their category. Likewise, when the small-cap or mid-cap category is expected to do better, the large-cap schemes cannot reap the benefit of such potential as they can only invest a maximum of 20% in mid-cap and small-cap companies.
Flexi Cap funds can help investors reap the benefit always whether the large-cap category is expected to do better or mid and small-cap category have potential to outperform.
Flexi cap funds invest across market capitalization which makes them riskier than pure large-cap funds, but less risky than pure mid-cap funds and small-cap funds.
5.Ideal for retail investors:
While investors with sizeable funds can spread their investment across large-cap, mid-cap and small-cap funds, retail investors with limited funds to deploy but looking to take advantage of the growth across companies can look at flexi-cap funds.
Key Takeaways from Net Brokers:
- Net Brokers believe that Flexi Cap funds offer investors an ideal mix of equities in an attempt to provide long term returns while minimizing risks associated with market volatility.
- Investing in a flexi cap fund is less risky as compared to a pure mid-cap or a small-cap fund as the fund manager has the flexibility to capitalize on the best available opportunities in the market at that time.
- A good Flexi Cap fund is one where large/mid/small cap allocation can be assessed and re-balanced periodically.
- A Flexi Cap fund, especially one which is dynamically managed, is ideal for meeting long term financial goals. It is best to have an investment horizon of at least five years to make meaningful gains.
- Always consider the fund manager record while investing in a flexi-cap fund.
- There could be ample reasons behind postponing investments such as people tend to think they do not understand the market, it’s already too late or they are concerned about market volatility, etc. In reality, there is no good or bad timing.
Net Brokers believes, if you are looking for a less rigid, more market-driven addition to your overall investment portfolio then a flexi cap fund could be your choice of investment.
Having a long-term investment horizon is the ultimate key to success for investments in flexi cap funds as ‘time in the market’ is more important than ‘timing the market.’
For more information, get in touch with us today.
Download our mutual fund app & start investing for your long-term financial goals.
Happy Investing.