Flexicap Funds: How they can help you optimise risk-adjusted returns of your portfolio

Updated: June 30, 2021 12:54 PM

Flexicap funds offer several benefits that can help you optimise the risk-adjusted returns of your portfolio.

Flexicap fund managers also have the flexibility to reduce their-small-cap exposure and increase their large-cap exposure, if deemed fit.

In the background of the current environment, flexibility has taken on new meaning. Companies are proactively changing their processes and policies. Work from home has become the new normal, and virtual meetings and schooling are growing on everyone. Do you think that all of this would have been possible if people and organisations 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 Flexicap funds.

Agile is the new mantra

Recently, the Securities Exchange Board of India (SEBI) introduced a new mutual fund category called Flexicap funds. These funds are multi-dimensional in nature. They are required to invest a minimum 65% of total assets in equity and equity-related instruments with dynamic allocation across large cap, mid cap, and small cap stocks. This means that depending on market conditions and opportunities, fund managers have the flexibility to invest in large cap, mid-cap, and small-cap stocks, all at the same time.

Flexicap funds offer several benefits that can help you optimise the risk-adjusted returns of your portfolio. Some of these benefits include:

Risk mitigation through diversification: We all know that investing across multiple asset classes can help us diversify our portfolios and reduce the risk of losses that stem from extreme movements in any one asset class. A similar benefit is provided by flexicap funds as well. Stocks from different market capitalisations have varying levels of risk. For example, small-cap stocks are considered relatively riskier than large-cap stocks. This is primarily because large-cap stocks are generally market leaders and have already demonstrated their growth and earnings potential. This makes them stable.

On the other hand, small-cap stocks are companies that are still in the early stages of growth and have not yet demonstrated their growth and earnings capabilities. Hence, there is a greater degree of uncertainty in these stocks. Now, in a falling market, small-cap stocks are likely to witness a sharper fall compared to large-cap stocks. The diversification element of flexicaps ensures that the losses accrued on small-cap stocks are minimised due to the exposure to large-cap stocks. Moreover, in such a scenario, flexicap fund managers also have the flexibility to reduce their-small-cap exposure and increase their large-cap exposure, if deemed fit.

Return optimization: Opportunities come in various shapes and sizes. It pays to be flexibile to invest across sectors and stocks, in order to capitalise upon the various opportunities in the market. Due to the dynamic and flexible nature of flexicap funds, fund managers can invest across market capitalisations and leverage emerging opportunities. 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.

ICICI Prudential Flexicap Fund: The flexibility that you need

Considering how value accretive flexicap funds can be, ICICI Prudential Mutual Fund has announced the launch of its flexicap fund. The fund will invest in a mix of large-cap, mid-cap, and small-cap stocks and dynamically shift between them based on prevailing market conditions, the macro environment, and stock specific opportunities. The fund follows a mix of top-down and bottom-up approach to identify opportunities across market cycles and rebalance exposure accordingly.

(By E Chandrasekaran, Founder & MD, ECS Financial Services(INDIA) Private Limited)

Disclaimer: These are the personal views of the author. Readers are advised to consult their financial planner before making any investment.

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