Understanding A Flexi-Cap Fund

What is the role of a fund manager managing a mutual fund scheme? To grab good opportuni- ties that help the fund generate alpha, i.e. the excess return over its benchmark index. But category regulations restrict a fund manager to navigate across the market capitalisation. There is one fund equity mutual fund category, however, that is the most flexible when it comes to picking stocks i.e. the flexi-cap fund.

What is a Flexi-Cap Fund?
The stock market broadly has three types of stocks based on market capitalisation – large-cap, mid-cap and small-cap stocks. The exposure to different types defines if a mutual fund is a large-cap, mid-cap, multi-cap, flexi-cap or a small-cap fund. All categories have specific limitations in terms of market capitalisation a fund can invest into. A flexi-cap fund is not bound by market capitalisation limitations. It can invest across the market spectrum depending on the market situation and valuations. The category was launched only recently to demarcate it from multi-cap funds. The crux is that a flexi-cap fund can increase or decrease exposure to large-caps, mid-caps and small-caps depending on domestic or global macroeco- nomic situations and market valuations – hence best placed to generate risk-adjusted returns.

What Makes Flexi-Cap Different?
The closest counterpart to a flexi-cap fund is a multi-cap fund. The latter invests in large-caps, mid-caps and small-caps in equal measure – 25 per cent each. No matter what the market situation is it will have to keep equal exposure among the three, unlike flexi-cap funds that can invest across the types in a proportion that the fund manager deems fit. Thus, a flexi-cap fund provides the widest spectrum of stocks when it comes to portfolio building. That up to 65 per cent has to be invested in Financial Planning equities is the only restriction flexi-cap category faces. Some funds in the category even have the flexibility to take exposure to international equities as well.

The Genesis
The flexi-cap category has its genesis in multi-cap funds. A multi-cap fund by definition was free to invest across large, mid and small-caps. There was no restriction on how much should be invested in each of the market-caps. Post 2017 when mid-cap and small-cap stocks took a beating, most multi-cap funds increased exposure to large-cap stocks, thus diluting the purpose of being a multi-cap fund. In order to address this, the market regulator came up with a rule of 25 per cent allocation each towards large, mid and small-caps. With this in place, there was no such category where the fund manager had the flexibility to invest across the market landscape without any restriction. To facilitate such flexibility, the flexi-cap category was introduced with an option that fund houses are free to change their multi-cap scheme into a flexi-cap scheme or launch NFO.

Does Investing in Flexi-Cap Make Sense?
The major reason behind this is the flexibility it offers. Based on the prevailing market valuations and macro setup, the fund manager has the leeway to mould the portfolio as per the changing times. In case the fund manager is of the view that the broader markets are better placed than large-caps, he or she can tilt the portfolio allocation towards mid and small-caps as a means to capture the upswing in these pockets. It is because of this reason that flexi-cap as a category has emerged as an investor favourite and has become the second-largest equity mutual fund category after large-cap funds. It had Rs1.71 lakh crore assets under management as on May 2021 compared to Rs1.90 lakh crore in the large-cap category. 

The writer is a Mutual Fund Distributor
 Email: sadaphene@gmail.com