PremiumThe category of flexi-cap funds has seen a lot of action of late. ICICI Prudential Mutual Fund has garnered record inflow of ₹10,000 crore in its latest new fund offer (NFO) for a flexi-cap fund. Nippon India Flexi Cap Fund’s NFO will close for subscription on 9 August.
Six flexi-cap funds, including those of ICICI Prudential and 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 and DSP are highlighting the past performance of their funds that have completed 25 years.
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 and 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 understand when it makes sense to invest in a flexi- cap fund.
Go anywhere funds
This category came into being after the Securities and 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- and 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- and small-cap stocks would have resulted in unnecessary churning of the portfolio, and 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 hand to 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- and small-cap space without any restriction. However, we have an in-house market cap model to provide direction and help ascertain the right allocation to various market caps. Further, based on macroeconomic factors and 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, and aid investors in reaching their financial goals effectively," said Nimesh Shah, managing director and 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 and should command the lion’s share in any portfolio," said Dhiraj Mittal, certified financial planner and 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- and small-cap stocks, you can take them through flexi-cap funds as well.
“The advantage of taking exposure to mid- and small-cap companies through flexi-cap funds is that you will not have to remain invested in mid- and 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 and founder, Ladder7 Financial Advisories.
However, the ability to deliver alpha will depend on the fund manager’s capabilities to identify the right trend and 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 and unless it is offering something unique. Go for a fund that has built a track record over time.
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