Flexi-cap funds offer a dynamic investment strategy by allocating money across large-, mid- and small-cap stocks based on prevailing market conditions. Investing in these funds through systematic investment plans (SIPs) will help balance risk and reward, making them well-suited for volatile markets.
With mid- and small-cap valuations expensive, flexi-cap funds offer a balanced approach to investment. While large-cap stocks provide stability, mid and small-cap stocks offer growth potential, giving these funds an advantage in both risk management and generating returns.
These funds have shown the ability to deliver competitive long-term returns while managing risk, making them suitable for both growth-oriented and conservative investors. Top performing flexicap funds such as Edelweiss Flexi Cap Fund and Quant Flexi Cap Fund have yielded 46% in the last one year. Over a five-year period, Quant Flexi Cap Fund has given returns of around 33% and Parag Parikh Flexi Cap Fund 25%.
Dynamic allocations
Unlike multi-cap funds, where 25% must be invested in each cap category, flexi-cap funds empower fund managers to shift the allocation based on market conditions. If mid- or small-cap stocks are overvalued, the fund manager will allocate more to large-caps for stability.
Conversely, if mid- or small-cap valuations become favourable, they can increase exposure to these segments, potentially enhancing returns. “This flexibility helps achieve a balance between risk and reward, offering a more resilient approach to navigating market fluctuations,” says Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor.
Currently, with mid and small-cap valuations appearing expensive, the focus has shifted towards low-beta, stable stocks to reduce risk exposure. Flexicap funds align well with this approach, as they allow investors to stay invested across market segments, capturing growth while minimising downside risk.
Flexi-cap funds benefit from active fund management, as managers can tap into opportunities in any market segment. “For investors seeking a balance between stability and growth, flexi-cap funds present an ideal solution, enabling them to weather volatility while benefiting from the diversified risk-reward profile,” says Anirudh Garg, partner, Invasset PMS.
Go for SIPs in flexicap funds
Investing in flexi-cap funds through SIPs helps spread investments over time and reduce the impact of market volatility. By combining the benefits of flexi-cap funds with the structured approach of SIPs, investors can work toward achieving their long-term financial goals while capturing growth opportunities across different market segments.
In fact, SIPs leverage the cost-averaging benefit, ensuring a more consistent accumulation of wealth. “Since flexi-cap funds dynamically adjust their portfolio across market segments, SIPs align well with long-term financial goals by capturing growth opportunities throughout market cycles,” says Nirav Karkera, head, Research, Fisdom.
Factors to consider
Investors should evaluate the allocation strategies and the fund manager’s ability to effectively navigate between large-, mid-, and small-cap stocks. It is important to consider the potential risks associated with mid and small-cap exposure. Stay informed about current market conditions and economic factors that could impact the performance of flexi-cap funds.
Investors should maintain a minimum investment horizon of five years to fully benefit from the diversification and growth offered by flexi-cap funds. Investors should be prepared for temporary capital losses and understand that these funds are not suited for short-term goals. “Flexi-cap funds are best suited for long-term growth, so ensure your goals align with this investment style,” says Anil Rego, founder, Right Horizons PMS.
It is essential to look for funds that balance growth potential with lower volatility, potentially focusing on low-beta stocks to manage risk.