INVESTING IN THE markets over the past 12-14 months has been tricky, with volatility being quite high and frontline Indian indices still in the red over this period, underperforming most Asian and advanced economies.
However, the domestic macroeconomic environment is fairly positive despite trade tariffs and geopolitical escalations. India’s GDP growth for FY26 is expected to be 6.5 per cent. According to the RBI, inflation is modest and interest rates are set to get lower, fiscal deficit is under control and tax collection is healthy.
Recent GST and income tax cuts would give further impetus to consumption. Government infrastructure spending is back on track after a lull. Corporate earnings growth has revived significantly.
The only discomfort comes from valuations that are not cheap from an overall broader market perspective.
Taking the flexicap route to investing would work well in the current environment. Such investing would ensure a measured allocation across large, mid and small cap companies depending on a host of factors. This approach also ensures portfolio diversification in investing across broader markets.
Why flexicap investing works
As indicated earlier, market valuations are not inexpensive currently. But they do hover around neutral levels.
Recent increases in capacity utilisation of companies (75.8 per cent; seasonally adjusted figure as of Q1 2025-26 according to RBI) suggests a favourable business cycle at play.
Market triggers may be positive or negative due to a host of factors such as FPI flows, trade tariff negotiations, geopolitical escalations, interest rate action from Central banks and so on.
Investor sentiments are neutral and in general dependent on news flow.
Since flexicap investing takes exposure across market caps, these factors can help understand volatility and make suitable portfolio moves.
If the market factors are negative, a higher large cap exposure would help bring stability to the portfolio. Large caps are better-placed to tackle volatility and manage risks.
When the triggers are positive, mid and small caps swing into action. In an upmarket, mid and small cap stocks could deliver strong returns, with the possibility of several companies even re-rating sharply.
Overall, the large, mid and small cap blend helps one gain from all types of markets with suitable risk management.
Taking the right approach
Making flexicap investing work requires taking a systematic approach and following a rigorous process.
The investment approach must follow a mix of top-down and bottom-up styles to identify opportunities in companies across market capitalisation.
A top-down approach is used predominantly in the large cap space and takes into account factors such as economic indicators, policy response, growth, inflation, global macros and future project pipeline.
The bottom-up approach is suited for selecting stocks in the mid and small cap spaces. So, growth outlook, size of addressable opportunities for companies, management performance, return ratios and valuations are considered important.
While the investment approach lays the broad contours, stock selection will be done on the basis of macros, company fundamentals, valuations and long-term growth prospects. Macros include current account status, fiscal deficit, GDP growth, credit growth, inflation, tax collections, capacity utilisation and corporate profitability.
The writer is the director of KCFS Investments Private Limited.