What are Flexi Cap Funds?
Flexi cap funds are equity-based mutual funds which can invest in companies with varying market caps, i.e., large cap, mid-cap, and small cap stocks.
Unlike some other types of mutual funds, there isn’t any mandatory allocation for each market cap segment. The fund manager is free to choose how to allocate funds, taking into account the prevailing market situations and the value of the firms.
SEBI mandates that flexi cap funds must allocate a minimum of 65% of their assets in equities and equity-related securities.
This is why Flexi Cap Funds are unique from other mutual fund schemes because they do not have to follow a specific allocation strategy but can adapt according to changing conditions.
How do Flexi Cap Funds work?
It gathers money from investors and makes investments primarily in equities. The fund manager then analyses the prevailing market trends, stock valuations, profit growth prospects, and risk factors to determine the amount of exposure in various market caps.
For instance, if the large-cap stocks seem safe during a turbulent period, the fund holds more exposure to mature stocks. But if particular mid-cap or small-cap stocks have higher upside potential, the fund manager increases exposure to them.
Hence, when asked what are flexi cap funds, the realistic answer would be that they are active equity funds designed for dynamic markets.
Why beginners like them?
The best part for a beginner is peace of mind. You do not have to create three equity bets and constantly fret about choosing the “wrong” market capitalisation category. A single flexi cap fund will help you gain exposure to different kinds of companies all at once.
Another advantage is that this portfolio can change according to changing market conditions. This is necessary because markets do not always favour any particular segment. In some years, large caps have outperformed while in some other years, mid caps or small caps have shone. The flexible cap funds are tailor-made for such changing market situations.
Key features of Flexi Cap Funds
Here are key features.
Flexible allocation
The fund is allowed to allocate its investments in the large-cap, mid-cap, and small-cap stocks with no fixed market capitalisation.
Active management
The fund managers can modify the asset allocation according to market situations and availability of opportunities.
Diversification
One fund can provide an opportunity to invest in companies of different sizes and, therefore, diversify the risks.
Equity-oriented. These are equity mutual funds and, hence, they look to grow in the long term using stock investments.
No rigid category limit. Flexi-cap funds, unlike the multi-cap funds, are not required to have a fixed investment pattern across different market capitalisations.
Can adjust to market cycles. In times of volatility, the fund manager can focus more on large caps, and in times of growth, the fund manager can move to mid or small caps.
Suitable for long-term investors. They are suitable for those looking for a simple and diversified equity investment.
Risks you should know
The Flexi Cap funds are still equity funds, and therefore subject to market risks. In case the market goes down, the fund will go down as well. If the manager decides to increase the holdings in riskier stocks, then volatility may increase.
There is also manager risk, since this type of investment fund relies mostly on active management. Because of this, the performance of one flexi cap fund can differ greatly from that of another fund. This is why fund quality is more important than the name of the category.
Who should invest in Flexi Cap Funds?
These funds can be a suitable option for investors looking to have equity exposure without having to worry about managing their own market-cap management. They can also suit new investors who are interested in having one diversified fund instead of constructing a whole portfolio.
They cater to those who have patience and tolerance towards volatility and would remain invested in their positions through ups and downs. If you wish to have a fixed allocation in only one segment of market capitalisation, there are other equity schemes available.
Flexi Cap Fund vs other equity funds
If you have no idea how flexi cap funds are different from other equity funds, then this short comparison can clear everything up.
The reason why this comparison is so useful is that it explains why many novices search for what are flexi cap funds after getting lost in other categories. Flexi cap funds operate as flexible and all-round equity funds rather than fixed bucket funds.
How to choose the right Flexi Cap Fund
If you are a first-time investor in mutual funds, you should not choose a flexi-cap fund merely based on its past performance.
The correct way would be to consider the management style of the fund, the level of risk it assumes, and whether the fund's style matches your objective.
Check the fund’s allocation style
While some flexi cap funds lean towards large-cap bias, others invest more in mid and small caps. A conservative strategy is generally more stable, while an aggressive strategy often results in higher volatility.
Look at consistency, not only returns
It is not sufficient to have only one good year. See how the fund has done well in various market scenarios and whether it has kept pace with its competitors and benchmark index.
Understand the fund manager’s approach
The freedom is high in flexi cap funds, so the investment process becomes very important. A clear and disciplined approach to investment is always better than arbitrary allocation changes.
Compare downside protection
The fund not only needs to do well in bullish markets, but also be able to protect investments reasonably in bad times. This is very important for a long-term investor.
Check costs and portfolio churn
A low expense ratio is good, but it should be taken into account together with portfolio turnover and overall quality. Excessive trading can reduce its efficiency over time.
Match it with your risk profile
If you are a new investor, pick a fund that you can stay true to during volatile market conditions. The right fund is not the one that gives you the highest returns, but one that you can be comfortable holding for long years.
Common investing mistakes by investors
Picking the right fund is just half the task. Avoiding the common mistakes while investing in mutual funds is another equally important part.
Pursuing past returns. Just because a fund performed well last year doesn’t mean it will do well next year.
Not considering fund style. There are flexi-cap funds that remain heavily skewed towards large caps, and thus the strategy may not be similar to the name.
Considering performance alone. Performance is important, but consistency, risk mitigation, and risk factors also hold equal importance.
Manager’s strategy is ignored. Flexi-cap funds depend a lot on the fund manager’s allocation strategy.
Low-risk expectations. Flexi-cap funds remain equity funds; hence, the element of risk comes attached to it.
Frequent switching. Investors tend to switch the fund after performing poorly within a short period instead of allowing the fund to mature.
Ignoring objective and time period. Flexi-cap funds suit long-term objectives rather than short-term money requirements.
Conclusion
Then what is a flexi cap fund? In a single line? These are flexible equity mutual funds that may invest among large-cap, mid-cap, and small-cap stocks based on market situations. These are beginner-friendly but risky at the same time since these are equity funds.
If you’re looking for an all-in-one equity solution with diversification and flexibility, then flexi cap funds can be a place to start. Just keep in mind that flexibility is important, but it doesn’t negate market risks.
