Flexibility to invest across large, mid and small cap stocks: Go for flexi-cap funds to manage risk

A midst elevated valuations in small- and mid-cap stocks, investing in flexi-cap funds can provide a balanced approach to manage risks.

As fund managers invest across large-, mid- and small-cap stocks without any restriction, such funds earn higher returns in the long-run and are ideal for core allocation.

Fund managers adjust allocations dynamically based on the market conditions. As a result, they can capitalise on changing market trends and valuations without the need to time the valuation. The diversification also helps spread risk, as different segments of the market may perform differently under diverse market conditions.

However, before investing in a flexi-cap fund investors should assess the fund’s performance across different market cycles. They should consider the track record of the fund manager on how successfully he has played a cycle and generated alpha over the benchmark or peers. Top performing funds such as Quant Flexicap, JM Flexicap and Bank of India Flexicap have given over 50% returns in a one-year period. Over a two-year period, these funds have given returns of over 25%.

Nirav Karkera, head, Research, Fisdom, says flexi-cap fund investors can gradually transition towards large-cap investments while maintaining exposure to mid and small-cap stocks. This will capture the recovery phase of the investment cycle. “Investors who are unable to shift their holdings towards large-caps will find flexi-cap funds a suitable option, as fund managers may have already begun reallocating towards large-caps,” he said.

Similarly, Anil Rego, founder and fund manager, Right Horizons, says flexi-cap funds contribute to building a well-diversified portfolio, which is essential for managing risk. “By investing across different market capitalisations, flexi-cap funds provide exposure to a wide range of companies and sectors,” he said.

Diversified portfolio

By investing in flexi-cap funds, investors gain exposure to companies across different stages of growth, from established large-caps to emerging mid-cap and small-cap companies. This dynamic participation across market caps over a long period of time helps investors generate wealth as investors remain invested across all stages of market phases. The adaptability can potentially lead to higher returns. A flexi-cap scheme also an opportunity to diversify their investment portfolio by rotating in companies across various market capitalisations based on macroeconomic conditions or other factors. “This diversification helps to reduce overall risk relatively and decrease volatility in the portfolio,” says Rego.

What to check before investing

Investors should understand the investment objective of the flexi-cap scheme and ensure that it aligns with their investment goals. They should look at risk-adjusted return comparison, vintage of the scheme, and expenses.

Jiral Mehta, senior research analyst, FundsIndia, says an investor should look at a number of quantitative and qualitative factors to derive conviction on the future potential of a fund. “They should consider factors such as consistency in performance and investment philosophy, risk management, a good fund manager with a long-term track record, robust investment process with clear communication, etc,” he said.

Hybrid or flexi-cap funds?

Hybrid funds invest in a mix of asset classes such as equity and debt securities to achieve a balance between growth and income. However, in the current market conditions, experts say flexi-cap funds are a better option for investors who have a long tenure and can endure the equity market volatility.

“Hybrid funds generally tend to be a large-cap oriented strategy within equity. This limits their ability to deliver superior returns as compared with good flexi-cap funds,” says Karkera.