Flexicap Equity Fund: An equity all-rounder fund

62-Shiney-Sebastian

EXPERIENCED INVESTORS will vouch for the fact that being flexible can help capitalise on investment opportunities arising from time to time. While equity continues to be the only asset-class that help beat inflation, is tax efficient and offers potential capital appreciation, one also has to recognise the truth that the asset class is also very volatile. But, with the right amount of flexibility, equity investing can be a truly rewarding experience. For a retail investor, flexicap is a category of equity mutual funds which combine the best of dynamism, diversification, risk mitigation and growth opportunity.

What is a flexicap fund?

A flexicap fund is an equity scheme that can invest in opportunities across the market capitalisation spectrum. Such a fund, at any given point in time, has the flexibility to go dynamically overweight/underweight across large, mid or small-cap depending on their relative attractiveness. The interesting detail here is that among the equity mutual fund categories, flexicap is the second largest. As per AMFI data, there are 25 flexicap funds with over 84 lakh folios, managing assets worth Rs1.59 lakh crore.

How it works?

In a flexicap fund, it is the fund manager who decides the market cap attractiveness on the basis of prevailing market conditions. With no minimum or maximum prescribed exposure limits in terms of market cap, flexicap funds can act as good compounders over long term with low potential risks relative to mid and small cap funds. While large caps hold the potential to deliver better returns owing to limited downside, it is mid and small caps which in an upmarket condition help generate better capital appreciation.

Why invest now?

Over last one year period (as of June 8, 2021), Flexicap funds on an average have gained 56 per cent, which is much better than large cap, and many thematic and sectoral funds. If the period under consideration is extended to three years, flexicap funds have generated 13.12 per cent CAGR, which is higher than international, tax-saving, and many thematic funds. Over a five-year period, this category has clocked in a CAGR of 14.3 per cent. This shows that a good flexicap has the potential to act as a sturdy anchor to the portfolio, helping the investor navigate various market conditions.

It is very likely that market volatility may prevail in near term given the evolving developments around pandemic situation and global growth recovery. Barring few pockets of the market, valuations in certain pockets are still reasonable. So, investing in select opportunities with reasonable valuations across market cap may be beneficial for investors seeking wealth creation in the long-term. This is where Flexicap funds can play a big role. The ideal risk-reward for a good flexicap fund will be middle of the diversified space (moderate) as the market-cap allocation is managed dynamically.

Things to consider

Given the various flexicap funds on offer, it is important to consider a few things before investing. Firstly, focus on the investment approach. A mix of top-down and bottom-up approach, to identify opportunities in large, mid and small cap space will be beneficial.

Second, a fixed or static strategy on m-cap exposure will not work. Thus, a good flexicap fund will be one where large/mid/smallcap allocation will be assessed and re-balanced on a periodic basis. For making this decision certain fund houses rely on in-house model. For example, in the case of ICICI prudential Flexicap Fund, the market cap allocation is based on an in-house model which takes into consideration various factors for deciding the relative attractiveness. Given the prevailing market conditions a 0-50 per cent allocation to small and midcaps can be considered as optimal with the remaining being invested in large caps.

Bolstering this category further is the news that one of India’s leading asset manager, ICICI Prudential Mutual Fund, will be launching the new fund offer of ICICI Prudential Flexicap Fund which will the open for subscription from June 28 to July 12. A flexicap fund, especially one which is dynamically managed, is ideal for meeting long term financial goals. It is best to have an investment horizon of at least five years to make meaningful gains.

Shiney Sebastian is managing director, Affluenz Financial Services (I) Pvt. Ltd, Kochi

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