You’ve probably heard of small-cap, mid-cap, and large-cap funds. If flexi-cap has recently caught your attention, then trust what your mind hints at. Yes, just like the name suggests, flexi-cap funds adopt a flexible approach to equity investment. This type of mutual fund invests in stocks across market capitalizations.
Being versatile and dynamic for investors, it has gained popularity in recent years. In 2024, they reached net inflows of ₹3,513 Cr, which was the highest in diversified-equity schemes.
If, as an investor, you have the hunt for the best flexicap fund on your radar, here’s complete information for sound decision-making.
What is Flexicap Fund?
Considering the concerns of the people, the Indian market regulator, The Securities & Exchange Board of India (SEBI) introduced flexi-cap funds in November 2020.
They are a type of equity fund with the flexibility of investing across the large-cap, mid-cap, and small-cap stocks. In other words, they grant investment opportunities across the market capitalization spectrum. Thus, these open-ended dynamic equity schemes can better handle risk-off sentiment.
According to SEBI’s latest announcement, flexi-cap funds should have a 65% investment in equities. However, there is no defined maximum.
Wondering too much to manage? You need not worry because fund managers manage market complexity and capture opportunities. These flexi-cap funds allow fund managers to adjust allocations considering the market conditions.
Note: Flexi-cap funds allow adjusting investment portfolios based on market conditions in contrast to multi-cap funds that follow predefined allocation rules.
Who Should Choose Flexi Cap Funds?
Now that you know what is flexicap fund, you must also understand that flexi cap funds are generally affordable but come with risks. Moreover, they are not tax-saving instruments. Considering these attributes, here’s a glimpse into for whom these funds are best suited:
● Moderate to high-risk appetite investors: They are subject to market fluctuations. Moreover, the small caps in the flexi cap fund portfolio can be more volatile, which increases the risk on one’s portfolio.
● Long-term wealth builders: They must have an investment horizon of at least 5 years to reap the full benefits.
● Diversified portfolio seekers: Those who look for exposure to various market caps and sectors in a single fund.
Factors to Consider When Choosing The Best Flexicap Fund
Flexi-cap funds quickly respond to market trends, aligning with the financial goals of investors. However, with multiple options available in the market, investors should consider the following important factors to choose the best flexicap fund:
Fund performance
You must take time to go through the historical portfolio composition of the fund over the past few years. Check out whether the fund has consistently maintained a balance of small, mid, and large caps or has shifted its strategy towards a particular market cap segment.
You can get help from fund fact sheets, mutual fund rating agencies, and AMC reports. Reviewing key metrics like annualised returns, standard deviation, Sharpe ratio, and expense ratio will also help. Understanding the fund’s risk-adjusted returns and consistency will help you decide whether it matches your expectations and risk tolerance.
Remember, fund performance will be one of your deciding factors, not the only crucial factor.
Expense ratio
Amongst the metrics mentioned in the previous point, you must be particular about the expense ratio. It is an often overlooked but critical factor. It is the percentage of the fund’s total assets that are used to cover the costs associated with managing the fund.
It incorporates:
● administrative fees
● marketing expenses
● other operational costs
It represents the annual fee an investor pays to the fund manager for managing their investment in the Flexi Cap fund. In a nutshell, a lower expense ratio generally means a higher return potential for investors.
Note: You must also check other fees that may apply in order to pick the best flexicap fund.
Investment strategy
Every flexi cap fund has a different investment strategy. There are those that focus on value investing, while the other might lay emphasis on growth stocks. When you evaluate a fund, check the investment strategy.
For example, a fund may adopt a value-investing approach. It will invest heavily in established companies trading below their intrinsic value. Whereas the other might focus on high-growth sectors like technology and healthcare.
You must compare strategies across different Asset Management Companies (AMCs) and pick the best flexicap fund that matches your investment style.
Fund manager experience
Look for fund managers with a proven long-term track record and professional expertise in optimising portfolio returns through sound decision-making. They must be able to seize emerging opportunities or respond to market shifts.
As stated earlier, small-cap funds bring along risks. However, when the market witnesses a bull run, an efficient fund manager will be able to make decisions and raise the fund’s allocation to small and midcaps. On the other hand, they will shift the ratio in favor of large caps when market volatility increases.
Alignment with investment goals and risk tolerance
As stated, your goals are your deciding factor. The best flexicap fund for you is the one that aligns with your goals, which can be:
● Long-term wealth accumulation: If you have long-term wealth buildup plans, then most flexicap funds can be your go-to option. There is enough potential for high returns as the market evolves over time.
● Short-term investment: If you have a short-term investment horizon of less than 5 years, you may face volatility, especially when the fund has a higher allocation to mid and small-cap stocks. So, if low-risk appetite is your type, you may prefer funds with a larger allocation to large-cap stocks. They will grant the needed stability, though probably with lower returns.
● Retirement Planning: If you are investing for retirement, again stability is the key. A flexi-cap fund with a more balanced allocation or a tilt toward large-cap stocks can provide a good mix of growth and safety.
In a Nutshell
The mutual fund market is welcoming people of varying risk appetites. With the idea of choosing the best flexicap fund and factors that you must keep in mind when investing in them, diversified portfolio seekers can pick them and avail benefits. The opportunity for higher returns during favorable market conditions with the incorporation of mid-cap and small-cap stocks awaits you while also helping mitigate risks. Assess your financial goals and take the first step toward sound investing!
