Flexible with Flexi cap Funds

Equity market timing is difficult and futile instead be flexible with flexi cap funds

Investing across market caps can help to navigate in any market conditions

Flexi cap funds have been winning hearts lately. In just 12 months, the net asset under management has zoomed from Rs 75,614 crore in January 2021 to Rs 2.22 lakh crore in December 2021. The average one-year return of this category is equally attractive – 29% for the period ended January 21, 2022. While the flexibility offered by the flexi cap funds (invests across market capitalisations – large cap, mid cap and small) seems to entice the investors, it is also the cautious optimism ruling the investor sentiment. Wondering what is “cautious optimism”?  

Chart 1 shows how market has rebounded sharply post coronavirus crisis since April 2020 till January 18, 2022 with impressive returns across market caps thanks to vaccine rollout and stimulus measures by the policy makers across the globe.  But given the sharp rise in the covid-19 cases recently and likelihood of the monetary policy tightening by the global central banks going forward, the question is how far this rally go? Will mid cap and small caps generate more alpha? Should investors stick to large caps?  This confusion and caution along with hopes of economic recovery prevails among investors. In addition, historically the winners across market caps keeps changing as seen in the calendar year returns Chart 2. Clearly indicating that predicting market movement is difficult.

Hence, in this scenario it is wise to be flexible. This can be easily done with the flexi cap funds wherein fund managers have the freedom to invest in companies across the market capitalisation (market cap) spectrum, i.e., large-cap, mid-cap, and small-cap stocks. This lends more balance to the portfolio and in turn helps to mitigate the downside risk.

Chart 1: Market phase analysis

Chart 2: Winners across market caps tend to vary

Source: BSE     

Notes: Returns for less than   one year is absolute and more than one year is annualized                                                 Data till January 21, 2022

Before understanding why flexi cap fund can be perfect solution to the long-term wealth creation understand the suitability aspect. With the launch of many new fund offers and encouraging returns, investors especially the first timers want to jump into bandwagon. Note, flexi cap funds are dynamic in nature and sharp market volatility will impact the fund’s performance. Fund manager’s ability to take timely tactical calls is most crucial. Hence, investors who want to have alpha from small and midcaps but the at the same time can bear the risk associated with it and have long term investment horizon can explore this category. Check the fund’s investing style, strategy and the portfolio attributes before investing as flexi cap funds are launched hardly a year ago.

Positives associated with the flexi cap category

Access to broader market - Flexi caps allow to harness opportunities across market segment. Large caps are well established stable companies which can help to limit the downside risk and offer the liquidity in event of the market uncertainties. On the flip side, mid cap and small caps can help to capture the upside potential in event of encouraging market environment.

Flexible - A fund manager gets the flexibility and freedom to be overweight/underweight across large, mid and small caps and this helps to pick growth opportunities in a bull market and limit the losses in the volatile or bear phase.

No need for investor to take asset allocation decisions across market caps - Tactical asset allocation is done by the fund manager wherein he or she can actively change the allocation from the market cap which was underperforming to more lucrative market cap.  

Benefit from the long-term potential of the equity - As an asset class by building a balanced equity portfolio has the element of both stable, quality businesses and also fast-growing companies.

By rotating allocations to different market segment, flexi cap funds can help investors to navigate in any market conditions. However, the flexi cap fund performance is based on the fund manager’s abilities to identify the right trend and move the allocation between stocks across market capitalizations. Hence, evaluate the track record of the fund manager before investing and preferably invest in funds which has shown good record over a period of time. Systematic investing for the long term can help to generate better risk adjusted returns and tide over interim market volatility.