Flexi-cap funds suited for core of long-term investment portfolios


Six flexi-cap funds, including those of ICICI Prudential Nippon India, have been launched since November 2020 when this category of funds came into being. Some fund houses are in the process of launching flexi-cap funds. Fund houses such as HDFC DSP are highlighting the past performance of their funds that have completed 25 years.

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Keeping pace

Flexi-cap funds are already a dominant category among equity schemes, with around 2.53 trillion under management. With valuations getting rich in certain market segments, fund houses want to have the flexibility to pick choose stocks across market capitalizations, where valuations are still reasonable.

“Today, all the three market cap segments are broadly offering similar risk-reward, making a case for flexible approach across market caps to capitalize on the opportunities,” said Manish Gunwani, chief investment officer, equity investments, Nippon India Mutual Fund. As an investor, you might be wondering if you should invest in a flexi-cap fund. Let’s understwhen it makes sense to invest in a flexi- cap fund.

Go anywhere funds

This category came into being after the Securities Exchange Board of India (Sebi) received a lot of flak for making it mandatory for multi-cap funds to invest a minimum of 25% each in large-, mid- small-cap stocks in September 2020. Sebi took the decision after it observed that most multi-cap funds were heavy on large-cap stocks. But forced allocation to mid- small-cap stocks would have resulted in unnecessary churning of the portfolio, would also have exposed investors to unwanted risk. Therefore, after receiving feedback from stakeholders, Sebi introduced the category of flexi-cap funds.

In flexi-cap funds, the fund manager gets a free hto go underweight or overweight on stocks across market capitalizations. Some funds have left it to the discretion of the fund manager to decide the allocation to stocks of various capitalizations, while some follow their in-house models to decide on the allocation to stocks to different capitalizations.

“ICICI Prudential Flexi-cap Fund has the flexibility to invest across large-, mid- small-cap space without any restriction. However, we have an in-house market cap model to provide direction help ascertain the right allocation to various market caps. Further, based on macroeconomic factors business cycle, the fund manager will fine-tune the allocation suggested by the model. This combination of flexibility with control, we believe, will help investors to comfortably navigate in any market condition, aid investors in reaching their financial goals effectively,” said Nimesh Shah, managing director chief executive officer, ICICI Prudential Asset Management Company.

Invest with care

According to experts, flexi-cap funds can be core of any portfolio for a long-term investor, as these are broad-based equity diversified funds with assets spread across market caps.

“Flexi-cap fund managers can deliver superior returns by prudently rotating allocations to different market cap segments based on their outlook. Flexi-cap funds are ideal for every type of investor should commthe lion’s share in any portfolio,” said Dhiraj Mittal, certified financial planner CEO, Prime Capital Services Pvt. Ltd, a New Delhi-based financial advisory firm.

“The scope to invest in any market cap also allows generating an additional return for investors,” said Harshad Chetanwala, a Sebi-registered investment adviser (Sebi-RIA).

If you are looking to take exposure to mid- small-cap stocks, you can take them through flexi-cap funds as well.

“The advantage of taking exposure to mid- small-cap companies through flexi-cap funds is that you will not have to remain invested in mid- small-cap stock when they are underperforming. The fund manager will take the call to alter the allocation to stocks of different market capitalizations,” said Suresh Sadagopan, a Sebi-RIA founder, Ladder7 Financial Advisories.

However, the ability to deliver alpha will depend on the fund manager’s capabilities to identify the right trend move the allocation between stocks across market capitalizations. The risk of investing in flexi-cap funds is the fund manager’s call going wrong, plus you will not have the control on the allocation to stocks of various market segments in your portfolio as it is will be decided by the fund manager.

Therefore, if you are investing in a flexi-cap fund, it is important to check the track record of the fund manager before investing. Also, it is always advisable to avoid an NFO until unless it is offering something unique. Go for a fund that has built a track record over time.

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