Flexicap Fund: A Worthy Category In Every Long-Term Portfolio
Founder,Invest My Paisa
When SEBI underwent the equity mutual fund scheme categorization, multi-cap was the category desig-nated where the portfolio corpus could be invested across large, mid and small-cap. But there was a catch. As per multi-cap category requirement, such a portfolio must invest at least 25 per cent each in large, mid and small-cap, a rule which rankled several portfolio managers. As a means to work around this challenge, SEBI late last year announced a separate category called flexi-cap, where assets can be invested across market capitalisation without any restrictions.
What is Flexi-Cap Fund?
A flexi-cap is a type of equity mutual fund which has the flexibility to invest across market capitalisation i.e. large-cap, mid-cap and small-cap. Here, the portfolio compulsorily has to invest a minimum of 65 per cent of total assets in equities. As a scheme investing across large, small and mid-cap stocks, flexi-cap funds are dynamic in nature. The diversified invest-ment also facilitates in mitigating risks and absorbing financial shocks from a volatile market. At the same time, companies of different sizes come with their own set of advantages and disadvantages. As a result, depending on market outlook and current scenario, fund managers have the flexibility to invest in companies that are best suited to make the most of the prevailing and future market conditions.
Why Invest in Flexi-Cap?
In the grand scheme of things, a flexi-cap scheme helps fund managers gauge the relative attractiveness of markets’ sub-segments and allocate investments accordingly. Hence, if you are building a portfolio to meet your long-term financial goals, a flexi-cap fund should be a part of the allocation. While there will always be an element of risk associated with equities, in case of flexi-cap a diversified investment in large-cap compa- Financial Planning nies is likely to help reduce or aid in counterbalancing the risk associated with mid and small-cap companies.
From a market perspective, taking exposure to equities through a flexi-cap fund can be apt given the prevailing market conditions. Given the continuous one way rally seen in the market since the March lows of 2020, Indian equity valuation is no longer cheap. That does not mean one should shy away from equities now. This is because if one were to consider the Indian markets from a business cycle perspective, we continue to remain attractive. There are several positive triggers such as economic recovery and corporate earnings growth, all of which will help the positive sentiment to continue.
What can play spoilsport in the market now is a probable rise in US 10 year Treasury yields, rise in inflation both in India and advanced economies, any change in Global Central Bank’s stimulus stance, to name a few factors. All of these have the potential to enhance volatility in the market. At such a time, in a flexi-cap fund the presence of large-cap will help in limiting downside and will provide liquidity to the portfolio. On the other hand, if the positive triggers play out, mid and small-caps are likely to be notable beneficiaries. The presence of these in the portfolio will help in capturing upside potential from the expected economic recovery.
In the present context, one of the good options for investors to consider would be the flexi-cap category as it allows the fund manager with the flexibility to reduce exposure to one category of stocks and increase weightage in another category. This category is ideal for investors who wish to have complete flexibility when it comes to investing in companies across market capitalisation buckets. The ideal investment horizon for such a fund is a minimum of five years and more.
The writer is a Founder, Invest My Paisa