Given the current market uncertainty and the elevated valuations in certain mid-cap and small-cap pockets, investors are preferring to invest in flexi-cap funds. These funds offer the unique advantage of allowing fund managers to switch between large, mid, and small-cap stocks without limitations.
The rigid mandates of other fund categories, such as multi-cap, mid-cap, and large-cap, limit the flexibility to adapt to market conditions. In contrast, flexi-cap funds have the flexibility to invest across the entire market spectrum and diversify the investment portfolio across companies with different market capitalisation. This helps them to adapt to changing market trends and optimise returns for investors without any restriction.
Feroze Azeez, deputy CEO, Anand Rathi Wealth, says the flexibility to shift allocation offers an opportunity to the fund manager to mitigate risks by taking exit calls and shifting to investments that have the potential to generate returns. “These funds help you get risk-adjusted returns as the blue-chip stocks will help you gain stability and small-cap stocks help you maximise growth,” he said.
Similarly, Nirav Karkera, head, Research, Fisdom, says the flexibility is particularly exciting for investors, as it empowers fund managers to make strategic shifts based on market dynamics, potentially leading to stronger risk-adjusted returns. “The proposition relieves the investor of the burden to actively manage market-cap exposures during times of heightened uncertainty like now. An additional benefit would be no exit load or tax implications despite such active management,” he says.
All-weather equity fund
Flexi-cap funds employ several strategies to mitigate volatility, including active allocation based on market conditions, market timing by adjusting the mix of large-cap, mid-cap, and small-cap stocks and a focus on high-quality and growth-oriented companies that are less susceptible to market fluctuations. These strategies enable the funds to adapt to changing market dynamics, reduce risk, and potentially provide more portfolio stability while seeking competitive returns.
Akhil Bhardwaj, senior partner, Alpha Capital, a SEBI-registered RIA, says flexicap funds can be considered as all-weather or all-season funds in equity where the investment is for the long term. “Flexicap’s dynamic feature of internally shifting money across different market caps provides an extra edge over other categories of funds. It becomes very convenient for the investor to invest and stay put for the long term,” he says.
In flexi-cap funds, the fund managers gradually shift from one market cap to another if there is any relative opportunity available. And it is due to the funds’ adaptability and active management style that fund managers can navigate changing market dynamics effectively.
“The high assets under management (AUM) and consistent popularity underscore their reputation as “all-weather” funds and their value as a diversification tool within well-balanced investment portfolios,” says Karkera. In fact, the average net AUM of flexi-cap funds in September was Rs 2.91 trillion, the highest amongst 11 equity-oriented schemes of mutual funds.
Mitigating volatility
This fund aims to reduce volatility by diversifying across various sectors and market capitalisations. When investing in a flexi-cap fund, it is advisable to have a horizon that extends beyond large-cap investments but shorter than small-cap investments.
Soumya Sarkar, co-founder, Wealth Redefine, a wealth management company, says the approach adopted by flexi-cap funds provides an advantage in managing and mitigating volatility risks. “For instance, if the small-cap segment is expensive and volatile, the fund manager can shift investments to large-cap or midcap, and vice-versa if the large-cap segment exhibits similar characteristics. The fund manager’s ability to make allocation decisions is crucial in mitigating volatility through this investment philosophy,” he says.
Before investing in flexi-cap funds, investors must assess their risk tolerance and comfort level with market volatility. Although flexi-cap funds can invest in any of the market caps, usually the largest allocation is given to large cap stocks. “This category is more of a proxy of large-cap stocks than mid or small. Hence, risk-reward would be similar to the large-cap category,” says Azeez.
MAJOR BENEFITS
The blue-chip stocks in a flexi-cap fund help you gain stability and the small-cap stocks help you maximise growth
There is no exit load or tax implications despite active management by the fund manager
This category is more of a proxy for large-cap stocks than mid or small