Given the volatility in the equity markets, retail investors are increasingly betting on flexi-cap funds. These open-ended dynamic equity schemes invest across large-cap, mid-cap and small-cap stocks which can mitigate the risk and lower the volatility in the portfolio. In fact, the net assets under management in this category touched Rs 2.4 trillion in February this year, the highest amongst 11 equity-oriented schemes of mutual funds.
In flexi-cap funds, fund managers invest across market capitalisation, assess the fund allocation and switch between companies and sectors depending on the performance from time to time. These funds can serve as an excellent starting point for those who are uncertain about their equity portfolio strategy or believe that active fund management across different segments could generate better results compared to creating a portfolio with funds that operate with more well-defined boundaries.
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Nirav Karkera, head, Research, Fisdom, says the fact that many flexi-cap funds have been able to deliver stronger risk-adjusted returns, especially during turbulent market conditions, has added to the category’s popularity. “The flexi-cap fund category offers investors an excellent opportunity to diversify their equity portfolio without being restricted to specific sectors or market capitalisations. Its flexibility and potential to generate higher returns have made it an attractive choice for many investors, making it a key part of a well-diversified portfolio,” he says.
The risk-return component in flexi-cap funds is well-balanced as fund managers take advantage of investment possibilities and market capitalisation. Anil Rego, founder, Right Horizons PMS, says for equity investors, the flexi-cap strategy is the best in these times as it allows to move funds between large, mid and small caps according to market situations. “In volatile scenarios, it is logical for investors to find safe places to invest, hence such strategies align more towards large-cap stocks during such times,” he says.
Similarly, Sreeram Ramdas, vice president, Green Portfolio PMS, says fund managers have the breath to skew their holdings towards small-caps or even mega-caps depending on the market situation, and investors seem to prefer delegating this responsibility. “In flexi-cap, fund managers have the ability to allocate to a deep value mega-cap like ITC
What to keep in mind before investing
As compared to standalone strategies like large, mid and small-cap investment strategies, flexi-caps have lower risk because they align as per market conditions quickly. However, investors must keep in mind that flexi-caps may not capture the upside in the same capacity as that of mid & small-cap funds once the markets start moving up.
Rego says flexicap as a strategy becomes meaningful when a portfolio manager is able to predict market movements and align the portfolio before an event happens. “A portfolio manager with an active portfolio style and a decent market reading ability may win the flexi-cap game,” he says.
Apart from examining the fund and risk management framework, it is important for investors to assess the nature of flexi-cap funds and its suitability for one’s portfolio. Karkera says investors aiming to build a portfolio with specific target market capitalisation allocations must be aware that investments in this category may result in significant and intermittent deviations from the target. “Therefore, it is important to consider the impact of such deviations and evaluate whether the portfolio remains aligned with one’s overall investment objectives,” he says.
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Investors must ensure that the fund house has robust fund and risk management frameworks in place to leverage the available flexibility without misusing it. Before investing, an individual must do a thorough review of the fund’s historical portfolios and understand the fund manager’s investment style across market cycles. Investors should also evaluate the fund’s performance against its benchmark and other comparable funds to ensure that it is generating returns that are in line with their expectations.
Recency bias is very common when deciding which fund to invest in. Ramdas says besides past performance, the number of holdings, sector-wise allocation and select valuation metrics must be looked at while investing. “We recommend staggering investments rather than investing in lump sums. During black swan events or sharp corrections, allocations should be advanced rather than postponed,” he says.
So, careful evaluation can help investors make an informed decision and maximise the benefits of the flexibility offered by these funds while minimising potential risks.
* Flexi-cap funds invest across large-cap, mid-cap and small-cap stocks
* Many of these have delivered stronger risk-adjusted returns even during turbulent market conditions
* These funds can serve as an excellent starting point for those who are uncertain about their equity portfolio strategy