 "flexicap")
Flexicap mutual funds refer to the schemes which have the flexibility of investing in securities across their market capitalisation, that is, smallcap, midcap and largecap stocks. According to the Securities and Exchange Board of India (Sebi), a flexi cap fund is an open-ended, dynamic equity scheme investing across large, mid and smallcap stocks. Over the past 2-3 years, many funds moved to the flexicap category, while a few remained in multicap.
How flexicap funds work
Flexicap funds operate differently from other mutual funds, such as multicap funds, which are bound by Sebi regulations to invest in specific market capitalisations. Unlike these restrictions, flexicap funds have more freedom.
However, to qualify as a flexicap fund, at least 65 per cent of its assets must be invested in Indian equities. Flexi cap funds are versatile investments that can adjust to different market conditions, potentially providing investors with better growth opportunities.
Features of flexicap funds
Diversified investment strategy: One of the primary appeals of flexicap funds lies in their diversified investment strategy. While some mutual funds concentrate solely on large or mid-sized companies, flexicap funds have the flexibility to allocate investments based on perceived value, regardless of company size.
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Dynamic asset allocation: Flexicap funds are actively managed, allowing fund managers to continuously evaluate market conditions and adjust asset allocations accordingly. This adaptability enables them to shift investments to promising market segments, such as midcap or largecap stocks, as opportunities arise.
Risk and returns: Flexicap funds invest in rapidly growing companies across various industries, potentially offering attractive returns. However, their versatility mitigates risk by avoiding overexposure to the volatility of smallcap stocks or the sluggishness of largecaps. Long-term investment is emphasised for potentially superior risk-adjusted returns, minimising concerns about short-term market fluctuations.
Broad market exposure: Investors in flexicap funds benefit from exposure to diverse market segments. Whether seeking the stability of largecap stocks or the growth potential of smallcaps, investors can potentially capitalise on opportunities across different sectors.
Adaptability to market conditions: The flexible nature of the fund equips them to navigate diverse market conditions effectively. During downturns in specific market segments, fund managers can pivot towards more promising areas, ensuring resilience in changing market environments.
Liquidity and taxation: Like most mutual funds, flexicap funds also offer good liquidity. The tax implications for flexicap funds are like those of other equity mutual funds.
As new investors flock to mutual funds amidst soaring stock market highs, financial advisors are advocating flexi cap funds as an ideal entry point.
Investors with a moderate to high-risk appetite are more likely to invest in flexicap funds than other equity funds, say analysts. “You can invest in flexicap funds if you are seeking stable returns and higher risk-adjusted returns. The advantage of a flexicap fund is that it is well-diversified, allowing market capitalisation to move freely. So if you are a risk-averse investor who wants to allocate funds in different market diversification levels to earn stable returns, then flexicap funds investments are a great option for you,” says a Upstox spokesperson.
Limitations of flexicap funds
Risk of losses from fund manager: Since these funds invest in all types of companies, the fund manager has to choose from a large pool of companies. So the performance of the fund depends upon the fund manager’s ability to choose the right set of companies based on the prevailing market trend to generate good returns.
Matching with right risk preference: Aligning investors’ risk preferences can pose challenges for this fund, as the fund manager’s allocation decisions may not always match investors’ expectations. Some flexicap funds may adopt an aggressive approach, favouring mid and smallcap companies, while others may prioritise safer investments in large-cap companies. Selecting the appropriate funds is crucial, as choosing incorrectly could result in either excessive risk.
