Flexi-cap mutual funds are the most recent category of equity mutual funds. Flexi-cap mutual funds are open-ended equity schemes, invest in stocks of companies across market capitalisation, be it mid-cap, large-cap or small-cap.
Flexi-cap funds are different from multi-cap funds as the latter has a regulatory limit to allocation in a certain type of company. However, in a flexi-cap fund, the fund manager has the liberty to pick stocks of any category of companies without any limit on allocation to generate growth for investors. In short, these equity funds have the advantage of creating better risk-adjusted returns for investors as fund managers feel free to ascertain the growth potential of companies and accordingly invest a higher proportion of assets in a particular type of company. Thus, flexi funds offer a better mix of growth and value to investors.
How Do Flexi-cap Funds Work?
The freedom is given to fund managers to manage flexi-cap funds helps in the long-term for investors. Being diversified schemes, they tend to strike a good balance between the risks and returns. Generally, returns from flexi-cap funds are either at par with large-cap funds or better. Additionally, such funds tend to deliver quite a steady return even in times when the overall stock market is not performing well. This essentially happens on the back of the fund managers’ ability to pick those companies in the portfolio which have the highest growth potential. Since there is no allocation restriction, at times the portfolios of flexi-cap funds could be tilted towards a certain kind of companies, irrespective of their market capitalisation. For instance, if the fund manager feels that a segment of the portfolio of flexi-cap funds is looking less attractive or finds there is no steam left, he can easily and quickly change the allocation to companies that have started to perform well. This ensures that investors have the best-performing stocks in the portfolio from time to time.
How Do Flexi-Cap Funds Compare With Other Equity Categories?
Flexi-cap funds have generated consistent returns for investors. With diversification in companies across the market capitalisation spectrum, they tend to minimise the risks, which otherwise would be much higher in schemes that invest in a certain category of companies and thus get quite concentrated in a particular segment.
In terms of performance, flexi-cap schemes have generated a stable return of 14.65%, 14.18%, 15.35% and 55.86% over the last 10 years, 5 years, 3 years and 1 year, respectively at the end of the first week of September. For the large-cap equity schemes, these numbers stand at 13.84%, 14.48%, 14.61% and 53.93%. Mid-cap and small-cap funds have outperformed the flexi-cap category by a large margin. But it is important to note that mid-cap and small-cap equity schemes have high risk associated with them given their mandate to invest only in one type of company in terms of market capitalisation.
Should You Invest In Flexi-cap Equity Mutual Funds?
You can consider investing in flexi-cap funds if you have a moderate risk appetite, want steady returns and if you are looking for investments with better risk-adjusted return dynamics. It is worth noting that flexi-cap funds offer investors a dual advantage of value and growth along with diversification. These three parameters make these funds a must-have. That being said, you must remember that fund managers’ commitment and ability to see the growth potential is the key for flexi-cap funds. If the investment calls of fund managers go right, the wealth generation capacity improves significantly. In case fund managers find that their investment calls look unattractive they can always change the allocation to better avenues of stocks. This way investors are at ease as they understand that flexi-cap funds will always attempt to chase growth by changing portfolios regardless of the size of the companies they invest in.
Things To Keep In Mind Before Investing In Flexi-cap Funds
Before investing in flexi-cap funds, you should assess which category in terms of risk-taking ability you belong to. If your risk appetite is moderate, flexi-cap funds are for you. If you want steady returns – neither too high nor too low – flexi-cap funds might work for you. While choosing a flexi-cap fund, it is advisable to look at the returns during the last five years at least. Don’t look at the short-term return in the last six months or a year while deciding on investment as this might have negative repercussions on your investment experience going forward.
Flexi-cap funds could be the preferred choice of investors who want a diversified portfolio with an aim to generate wealth creation from the best performing sector of the market. They are among the best equity schemes in terms of risk-adjusted return from the perspective of the long-term investment horizon. The ability to tactically change the allocation irrespective of market capitalisation makes flexi-cap funds a steady performer. But do take into account your goals, risk appetite, returns and horizon before investing in flexi funds or take help of a financial advisor for better guidance.
The writer is CEO, BankBazaar.com, an online marketplace for loans, credit cards and more.