Understanding Flexi Cap Funds
The Securities and Exchange Board of India (SEBI) has always been in tune with the changing needs of investors. On November 6, 2020, SEBI announced a new category of multicap funds called flexi cap funds. These funds need to invest a minimum of 65% of their assets in equity and equity-related instruments. In this article, we discuss the main features of flexi cap funds, their advantages, and how they differ from multicap funds.
What is a Flexi Cap Fund?
A flexi cap fund is an equity mutual fund that invests in companies of various market capitalizations—large-cap, mid-cap, and small-cap—without any predetermined allocation mandate. This flexible investment strategy enables fund managers to reallocate based on market trends and growth prospects.
There are 25 flexi cap mutual fund schemes presently available in the market, according to the Association of Mutual Funds in India (AMFI). SEBI has a rule that requires at least 65% of a flexi cap fund's assets to be invested in equities, giving investors a diversified and versatile investment option.
Fund managers can choose to invest in small and mid-cap companies with high growth potential or have a robust large-cap presence to ensure stability. Fund managers concentrate on firms that have good earnings potential, good return ratios, and healthy cash flows.
Who Can Invest in Flexi Cap Funds?
The economic slowdown during 2020 affected mid and small-cap players considerably, instilling doubts in their stability. At such periods, flexi cap funds see more allocation to large-cap players. But with an improvement in market conditions, they can readjust allocations in mid and small-cap stocks for taking advantage of growth.
Flexi cap funds are suitable for those with a high to moderate risk appetite who are willing to invest for a period of five years or more. Although small-cap stocks in flexi cap funds are volatile, large-cap investments stabilize risks while providing growth opportunities as well.
Important Points to Consider Before Investing in Flexi Cap Mutual Funds
- Before investing in flexi cap funds, consider the following points:
- Define the investment goals and select funds suitable for your financial objectives.
- Understand the allocation strategy of the fund, as some funds have a mix of top-down and bottom-up allocation.
- Flexi cap funds have no pre-set mid-cap allocation; they will dynamically change the holdings according to market conditions.
- Some fund houses employ in-house models to calculate allocation, where mid and small-cap exposure could be between 0% to 50% based on the market trend.
- Since they are dynamic in nature, flexi cap funds offer a diversified portfolio that ensures risk and return balancing in the long run.
- Investors must have a long-term outlook while investing in flexi cap funds to derive maximum benefit from market volatility.
Flexi Cap Funds vs. Multicap Funds: Major Differences
- While deciding between flexi cap and multicap funds, investors must analyze their risk appetite and investment horizon. Following are some major differences:
- Multicap funds need a minimum 75% exposure to equity, whereas flexi cap funds need only 65%.
- Multicap funds have a systematic allocation between large, mid, and small-cap stocks, while flexi cap funds permit fund managers to invest without restriction across market capitalizations.
- Fund managers in multicap funds have to adhere to certain rules of market cap allocation, while in flexi cap funds, they have full freedom to allocate assets as per market opportunities.
Comparative Analysis: Flexi Cap vs. Multicap Mutual Funds
Particulars
Flexi Cap Fund
Multicap Fund
Equity Exposure
Minimum 65%
Minimum 75%
Market Cap Allocation
No fixed mandate
Fixed allocation across caps
Fund Manager’s Discretion
Full flexibility across market caps
Restricted to predefined allocations
Conclusion
Flexi cap funds offer investors diversification and flexibility, and hence are a good investment choice in volatile market conditions. SEBI launched these funds to cater to different risk appetites and provide more investment freedom than multicap funds. While multicap funds guarantee a systematic allocation, flexi cap funds enable fund managers to change their strategy according to market performance.
For long-term growth with market volatility management, flexi cap funds prove to be a great option for investors. Prior to making an investment, consulting a financial advisor is suggested in order to check whether the investment is appropriate for one's risk tolerance as well as financial objectives.