Flexi Cap Investments: Is It A Suitable Way To Adapt In Changing Markets?

Flexi cap funds have lately emerged as a potentially suitable strategy for navigating volatile markets. These mutual funds invest in companies with different market capitalisations, large, mid and small caps, and reallocate assets dynamically as markets shift. The only Securities and Exchange Board of India (SEBI) mandate they must adhere to is that at least 65% of the portfolio has to be invested in equities and equity-related instruments at any point in time.

Let’s see how flexi cap funds may potentially help investors adapt to the changing markets.

Table of contents

• Key features of flexi cap funds
• How flexi cap investments work in changing markets
• Potential benefits of investing in flexi cap funds
• Risks to consider before making flexi cap investments in India
• Comparison: Flexi cap vs other equity funds
• Who should invest in a flexi cap fund?

Key features of flexi cap funds

• Diversified: Flexi cap funds are diversified by nature since fund managers can invest across large cap, mid cap and small cap stocks based on market opportunities. They are free to reallocate assets based on market movements to optimise return potential and mitigate risk.
• Actively managed: Fund managers make strategic decisions to help with potential growth of the fund based on the prevailing market conditions. This is one of the primary reasons why flexi cap funds come with a higher expense ratio as compared to most other types of mutual funds.
• Risk-return ratio: Flexi Cap funds aim to balance potential risk by leveraging potential opportunities across the market spectrum based on the outlook of fund managers.

Also Read: What are Flexi-cap Funds?

How flexi cap investments work in changing markets

Flexi Cap funds are actively managed mutual funds where fund managers constantly evaluate market trends, economic indicators, growth potential of companies, where they have invested, and sectoral opportunities to reallocate assets. The main aim is to optimise potential returns while managing risks. The only guideline they must follow is to maintain 65% assets in equity and related instruments.

This may help in changing markets as the constitution of the fund may keep changing and adapting to the market.

Potential benefits of investing in flexi cap funds

Here are the potential benefits of Flexi Cap fund investments:

• Suitable for changing market cycles: Flexi cap funds may adjust their allocation based on market cycles, which means that they may allocate more assets towards large caps during volatility for relative stability and shift to mid or small caps during bullish phases for growth potential. This adaptability helps investors navigate varying market conditions.
• Diversification across market caps: These mutual funds invest in large cap, mid cap and small cap stocks, allowing investors to potentially benefit from relative stability, growth potential, and potential return opportunities—all in one portfolio. Many investors may opt for a Systematic Investment Plan (SIP). They use an SIP calculator to estimate the potential returns on their monthly investments over a specified period. .

The calculator is an aid, not a prediction tool. It may provide only an indicative picture.

• Potentially favourable taxation rules: Since flexi cap funds fall in the equity mutual funds category, they follow equity taxation rules. This may benefit investors if they invest for more than a year as these gains are taxed at a relatively lower rate compared to short-term capital gains.

Risks to consider before making flexi cap investments in India

Here are a few types of risks your flexi cap investments may be exposed to:

• Market volatility: Since flexi cap funds invest across large, mid, and small cap stocks, they may be sensitive to market fluctuations. This is because small and mid cap stocks may experience sharp ups and downs in turbulent economic conditions.
• Fund manager performance: These funds tend to rely heavily on the fund manager’s judgement to allocate assets across market caps. This is why it is important to invest in a flexi cap fund managed by an experienced fund manager with a track record of performance across market cycles. Past performance may or may not be sustained in the future.
• Liquidity and valuation risk: During market downturns, it may be difficult to exit positions in mid and small cap stocks without impacting prices. This may affect overall potential returns from investment. In addition to this, exposure to overvalued mid and small cap stocks may impact returns from Flexi Cap investments in India.

Comparison: Flexi cap vs other equity funds

Other than multi cap funds, most types of equity funds are restricted by market cap, sector or investment category, which makes flexi cap funds a unique investment instrument. Only multi cap funds and flexi cap funds have the freedom to invest in stocks of companies across market capitalisations. The differentiating factor between them is that multi cap funds must maintain a total of 75% assets in equity and equity-related instruments with 25% assets each in large, mid and small cap stocks. However, flexi cap funds only need to maintain 65% assets in equity and equity-related instruments without any cap restrictions.

Also Read: Turning Volatility Into Opportunity With SIP In Flexi Cap Fund

Who should invest in a flexi cap fund?

While there are no best flexi cap mutual funds, flexi Cap investments in India might be suitable for investors with a long-term investment horizon and moderate to high-risk appetite.

In conclusion, a flexi cap fund provides a combination of portfolio diversification, risk management, and growth potential all within one instrument. The investment is exposed to risks tied to market volatility while the asset allocation decisions made by fund managers help determine the actual results. These funds may be an important component of a diversified portfolio where investors are aiming for a relatively steady return potential while mitigating risks across market ups and downs.

FAQs:

What are flexi cap funds in mutual funds?

Flexi cap funds invest in stocks of companies across market capitalisations such as large cap, mid cap and small cap without any fixed asset allocation limit. Fund managers may dynamically adjust the portfolio based on market conditions while maintaining asset allocation of 65% or more in equity and equity-related instruments.

Flexi Cap vs Multi Cap: How are flexi cap funds different from multi cap funds ?

While both multi cap and flexi cap funds invest in companies across market capitalisations, they are quite different from each other. Multi cap funds must maintain a minimum 25% asset allocation each in large cap, mid cap and small cap segments. While flexi cap funds are only required to maintain a 65% asset allocation in equity and equity-related instruments with no cap restrictions.

Are flexi cap funds suitable for long-term investors?

Flexi cap funds may be considered suitable for long-term investors with a high-risk appetite due to their diversified portfolio across large, mid, and small cap stocks. The flexibility to allocate assets in different stocks irrespective of their market capitalisation allows fund managers to adapt to changing market conditions and potentially capitalise on potential growth opportunities over time.

What are the risks involved in flexi cap investments?

While all equity investments always come with a level of risk, flexi cap funds may be subjected to a higher level of risk because they invest in mid cap as well as small cap stocks. Small enterprises may face price swings due to market trends and liquidity issues. Thus, investors are advised to exercise caution and refrain from making emotionally charged decisions in the short-term while investing in Flexi cap funds.

How do flexi cap funds perform in volatile markets?

Flexi cap funds have the potential to adapt to volatile markets due to their flexible investment strategy. Fund managers may shift allocations towards large cap stocks for relative stability in times of uncertainty and increase exposure to mid and small caps for higher potential returns in bullish phases.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed.The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.