What is Flexicap Funds?

Flexicap funds are diversified equity mutual fund schemes which can invest across various market cap segments. In a Flexicap fund, there is no upper or lower limits with respect to investing in any market cap segment. Any percentage of fund assets can be invested basis the view of the fund manager or the market outlook, in any market cap segment known as large cap, midcap and small cap. This is the primary reason why Flexicap mutual fund is one of the most popular mutual fund category as far as equity funds are concerned.

In summary Flexi cap fund meaning, funds which can invest across various market caps without any restriction.

As per the SEBI circular, Flexi-cap funds will have to have a minimum of 65% of their assets in equity and equity-related investments. There is no cap on how much these funds can or need to invest in large, mid, or small caps.

What are market capitalization segments?

A stock’s market capitalization is derived from the market price of the stock X the number of shares outstanding. According to SEBI (Securities Exchange Board of India), stocks can be classified into 3 market capitalization segments – large cap (top 100 stocks by market capitalization), midcap (101st to 250th stocks by market capitalization) and small cap (251st onward stocks based on market capitalization).

We discussed what is Flexi cap mutual funds, let us now read why invest in?

Why invest in Flexicap Funds?

One market cap segment cannot keep outperforming across all market conditions over the various investment cycles. Winners keep rotating based on the historical data available for different market cap segments during various investment cycles as you can see the chart below. Flexicap funds may generate better risk adjusted returns by rotating allocations to different market cap segments based on the fund manager’s outlook.

framework
For illustration purpose only

Source: National Stock Exchange, Advisorkhoj Research (as on 24th January 2023). Nifty 100 TRI represents large cap, Nifty Midcap 150 TRI represents midcap and Nifty Small Cap 250 TRI represents small cap stocks. Disclaimer: Past performance may or may be sustained in the future.

Benefits of Flexicap Funds

  • Aids in mitigating risk and managing volatility: The table below shows the 5 biggest market drawdowns in the last 10 years or so and the impact on various market capitalization segments. You can see that large caps (Nifty 100 TR) are considerably less volatile than midcap (Nifty Midcap 150 TRI) and small cap (Nifty Small Cap250 TRI) stocks. A Flexi Cap Fund has no ceiling on a particular market capitalization rather it provides the ease of moving across market caps. Now not all three market caps outperform at a given point in time, neither all underperform at once. So, a fund manager can shift allocations as per the market outlook. The flexibility of moving across market caps further aids in managing volatility and mitigating risk.

    •  

    DrawdownEventNifty 100 TRI (%)Nifty Midcap 150 TRI (%)Nifty Small Cap 250 TRI (%)
    Feb – Mar 2020COVID-19 1st Wave-36.64-38.03-42.15
    Aug 2015 – Feb 2016China Slowdown-18.96-18.45-23.26
    Jul – Dec 2011US Sovereign Rating downgrade-20.86-27.13-29.62
    Jan – Jun 2022Russia Ukraine War-15.13-17.17-22.86
    Jan – Sep 2013US Fed Taper Tantrum-14.69-24.05-31.48
    Aug – Oct 2018US China Trade War-13.79-19.29-21.49
    Oct – Dec 2016Demonetization-10.17-14.58-15.77

    Source: National Stock Exchange, Advisorkhoj Research (as on 31st December 2022). Nifty 100 TRI represents large cap, Nifty Midcap 150 TRI represents midcap and Nifty Small Cap 250 TRI represents small cap stocks. Disclaimer: Past performance may or may be sustained in the future.

  • Higher chances of generating alpha: Large Caps are mature businesses with proven track record, therefore are relatively less volatile than the other two. Whereas mid and small caps are growing businesses, have potential of moving up the curve at a faster pace which makes them relatively more volatile. Therefore, large caps could act as an anchor to the portfolio while mid and small caps are fasteners aiding in potential alpha generation over longer investment horizon.
  • Flexi Cap has higher liquidity over mid and small cap funds: The percentage of free floating shares of mid and small cap companies is much lesser compared to large cap stocks since these companies usually have high percentage of promoter holding.
  • Suitable for retail investors: Flexicap funds are quite suitable for investors who are unable to understand / decide their investment allocation towards various market cap segments, can find Flexi cap funds as their automatic choice. The other added advantage is that due to diversification across different market cap segments, it reduces the unsystematic risks and can generate better risk adjusted returns.

We have read the benefits of Flexi Cap funds, let us now check who should invest in it?

Who should invest in Flexicap Funds?

  • Investors with an aim for capital appreciation over long investment horizon Investors who can tolerate high to very high risk.
  • Investors who have long term investment horizon of at least 5+ years investment tenures.
  • You can invest in these funds either in lump sum or SIP depending on your financial situation and investment needs.

 

Investors should consult with their mutual fund distributors/ financial advisors to know what is flexi cap mutual funds and if it is suitable for their investment needs basis their risk profile.

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

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The information contained in this document is compiled from third party and publically available sources and is included for general information purposes only. There can be no assurance and guarantee on the yields. Views expressed by the Fund Manager cannot be construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Mirae Asset Investment Managers (India) Private Limited (the AMC) shall have no responsibility/liability whatsoever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts no liability for any loss or damage of any kind resulting out of the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such information shall be done only after consultation to the financial consultant to understand the specific legal, tax or financial implications. Investors are advised to read the Scheme Information Document of the respective scheme to know in detail about the product before investing.

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