Since flexi-cap funds invest across market cap segments, they offer both growth and value to investors and at the same time, strike a balance between risk and volatility in a single portfolio
Flexi-cap funds are those mutual funds which invest in equity and equity-rated securities of companies in a flexible manner across market capitalisation such as small-cap, mid-cap and large-cap. These funds are open-ended, dynamic equity funds and have to invest a minimum of 65% of total assets in equity and equity related securities. By investing in such funds, investors can probably mitigate their risks and lower volatility.
Flexi-cap funds can invest in any company irrespective of the firm’s market capitalisation whereas mid-cap or small-cap funds are bound to invest within the category. This category was launched recently to differentiate it from multi-cap funds. Multi-cap funds also invest across small cap, mid and large cap stocks but with an equal measure of 25% each. But, flexi-cap fund managers have the freedom to assess the growth potential of various firms without considering its size and invest the money across various market segments and companies. Further, these funds invest in the best performing firms which are market leaders in their own field of business, follow proven robust business models, strong balance sheets, etc. So, these funds are in an advantageous position to generate better risk adjusted returns.
Is it good to invest?
These funds offer a well-diversified portfolio to investors as they balance the risk and return aspects. These funds are also known to deliver steady returns even during times of a volatile and bear market phase. Further, if the fund manager observes that a particular market segment in which he had invested has turned out to be unattractive over a period of time, then the fund manager can change the allocation to some other lucrative and alternative segment.
This provides investors the dual advantage of not only investing in the best-performing companies but also the option to exit from the unattractive firms. Market capitalisation plays a crucial role while selecting firms to invest in by the mutual fund houses. One cannot always make a decision purely based on market capitalisation as other factors such as a company’s growth potential, track record, associated risks, etc., also matter a lot. As these funds invest across the market cap segments, they offer both growth and value to investors at the same time, striking a balance between risk and volatility in a single portfolio.
Suitable for whom?
Flexi-cap funds are generally suitable for investors who are willing to invest their money for a period of five or more years to meet their long term financial goal. One can expect returns that beat the inflation rates and higher than that of the fixed income options. Owing to its flexible nature, it attracted the attention of investors and emerged as the second largest equity mutual fund category after large cap funds.
To conclude, investors who like to build an equity portfolio that invests in quality firms which have a potential to generate value over a long period of time could opt for the same. Though it has the flexibility and best risk adjusted returns, investors should also keep in mind the possible ups and down in their investments.
The write is a professor of finance & accounting, IIM Tiruchirappalli