All you need to know about Flexi Cap Funds

New Delhi : The Securities and Exchange Board of India (SEBI) introduced the Flexi Cap Fund equity scheme on November 6, 2020. This category of funds invests at least 65% of its assets in equities and equity-related instruments. Investment in flexi cap funds is allocated dynamically across small cap, mid cap and large cap funds. The introduction of flexi cap mutual funds has been good news to multi cap fund managers.

SEBI later issued guidelines that require multi cap funds to invest a minimum of 75% of their overall assets in equities. This includes a minimum of 25% exposure each in small cap, mid cap and large cap stocks. The aim is to diversify the portfolio of multi cap funds across small cap, mid cap and large cap companies and differentiate them from other categories of investment schemes. 

Before the introduction of flexi cap funds, fund managers were often unsure of merging the portfolio with other investment schemes or reshuffling the portfolio. But now, fund managers have much greater flexibility with flexi cap mutual funds. As a result, they can invest wherever opportunities and value are available without any check on the market cap. Asset management companies could launch a scheme under this category right away or convert an ongoing scheme, such as a multi cap fund, into flexi cap, by complying with the need for change in the fundamental features of the scheme.

Are Flexi Cap Funds Good for Investors?

The introduction of flexi cap funds is good news for investors as well. Lower allocation in large caps and higher allocation in small and mid-caps via multi cap funds would have affected the portfolio's stability. Therefore, it is favourable for multi cap funds with significant allocation in large caps to rebrand themselves as flexi cap funds. However, this may not be the case with some schemes that have predominant allocation in small and mid cap equities.

So, investors can choose between a flexi cap fund with dynamic investment across market caps and a multi cap fund that balances its allocation across market caps. The decision should be based on each individual investor’s risk appetite. 

According to SEBI, the scheme name must not be different from the scheme category. This will help investors identify schemes easily and establish uniformity in scheme names under a specific category across mutual funds. Asset management companies must make sure that a proper benchmark is adopted for the fund scheme under the flexi cap category.

Who are the Best Candidates to Invest in a Flexi Cap Fund?

The COVID-19 pandemic affected the growth prospects of various small and mid-sized companies in India. On the other hand, several smaller cap companies are affected by issues associated with business stability and corporate governance. Opting for good investment opportunities in these companies can be a risky step. 

Flexi cap funds have the potential to offer better exposure to large cap stocks. Nevertheless, as and when market conditions go in favour of small and mid cap stocks, flexi cap mutual funds may escalate allocation in these segments.

Smaller caps are exposed to higher volatility, due to which the risk associated with the portfolio also rises. The inclusion of large caps in the portfolio can offset a part of the volatility. As a result, flexi cap funds are a good fit for investors who can take moderate to high risk and have a minimum investment horizon of 5 years.

To conclude, flexi cap funds can invest in any stock, regardless of the company’s market capitalisation. This is unlike small cap and mid cap funds, where the investment is based on market cap. Flexi cap funds come with a diversified portfolio that helps the funds to better balance the return and risk aspects. Moreover, these funds may generate steady returns even during a bear phase of the market. The fund manager can assess the allocation of funds and switch between diverse sectors and companies, as per their performance from time to time. 

When you look for the best flexi cap mutual fund, consider key features like the benchmark index, minimum application amount and additional amount and exit load to make an informed decision.