Looking to invest across the market and put your money in outlier small-cap companies, emerging mid-cap companies, and reliable, blue-chip, large-cap companies, all at once, but don’t want to constantly decide on their category-wise allocation every time? If yes, flexi-cap funds are the way to go.
With ICICI Prudential Mutual Fund launching an NFO (New Fund Offer) for a flexi-cap fund that will run between June 28 and July 12, we take a deep dive into what flexi-cap funds are and how they have performed over the years.
In a notification dated November 6, 2020, Securities and Exchange Board of India (Sebi) introduced a new category of flexi-cap funds, demarcating them from multi-cap funds, which had been mandated to invest at least 25 percent of its funds into each large, mid and small-cap stocks.
But for those who did not wish to conform to this sectoral ceiling on market capitalisation, there was an option to rename their fund offerings to flexi-cap. With 25 schemes currently in the market, these funds have had a tumultuous ride over the last three years-with negative returns of 5.21 percent in 2018 to soaring over 15 percent in 2020, as per ValueResearch.
Based on an in-house market capitalisation allocation model, these funds have room for dynamic investing across large, small and mid-cap funds, with a minimum required investment of at least 65 percent of total assets in equity instruments. On the other hand, multi-cap funds require a minimum 75 percent allocation in equities.
Since there are no allocation specifications to be followed, investors can take advantage of all market movements, across all market segments. This means depending on the market conditions, the fund manager can rebalance the portfolio, increasing large-cap allocation during market lows and investing more across small and mid-cap segments to harness the growth momentum. This also allows for higher market liquidity for these funds.
Association of Mutual Funds of India's (AMFI) recent data is a testament to the rising investor confidence in flexi-cap funds since the start of this year. While the funds saw an outflow of Rs 9,044 crore between January and March 2021, the inflows increased to Rs 260 crore in April 2021 to a steep Rs 1,130 crore in May.
Flexi-cap funds have had a solid track record in terms of returns as well, with their annual returns inching as high as 59.64 percent and a 10-year yield of almost 13 percent. Even looking at their monthly returns, there has been a steep increase from -1.44 percent in January 2021 to 6.39 percent in May. The returns rose to an all-time high in February 2021, ranging at almost 8 percent. As a result of this fund’s structure, investors get the dual benefit of not only investing in the best-performing stocks but also the option to exit from the unattractive ones.
“Flexi-cap funds offer a diversified portfolio due to which the fund balances the risk and return aspects pretty well. These funds are also known to deliver steady returns even during times of a bear market phase. Also, the fund manager can choose to assess the fund allocation and switch between different companies and sectors depending on the performance from time to time,” Viral Bhatt, Founder, MoneyMantra explained.
What is also notable is the marginal rise in the Asset Under Management (AUM) of these funds, from Rs 1,58,700 crore in the first quarter of 2021 to around Rs 1,59,000 crore in May. Nema Chhaya Buch, an independent financial strategist, advocates for flexi-cap funds. “When there is a broad market rally and all segments are growing then for the funds as well as investors it makes sense to take advantage of this kind of movement. Given that small and mid-cap stocks have higher growth potential, these funds have the capacity to provide risk protection along with high rewards. But one should carefully consider the fund manager record while investing in a flexi-cap fund,” she says.