Flexibility is key in stock market investing – and Flexicap Funds offer just that

Equity markets are dynamic in nature and all the stocks that form a part of the markets do not always move in sync with each other. At times, the large-cap stocks might be in the limelight and on other occasions, the mid or small-cap pockets might be in vogue. Blue chip stocks, which are looked upon as the safest bets, may not always be the best-performing in terms of returns and could often be dwarfed by peers from the broader markets.

In such a scenario, selecting a particular market segment for investment can prove to be challenging. For example: An index fund may not look beyond the Sensex, Nifty or the Nifty Next 50. A large cap fund will have the bulk of its investments in large companies while a midcap or smallcap would have at least 65% of their respective assets in mid-cap and small-cap companies, respectively. Most categories of equity mutual funds such as Large, Multi Cap, Mid Cap, Smallcap, Large & Midcap are bound by their respective nomenclature.

Relevance of Flexicaps
Flexibility is an important aspect of investing and plays a key role in maximising returns. Simply put, flexibility is the power to invest in companies across market capitalisations without worrying about the category of the stock.

In such a scenario, Flexicap Funds come handy as the funds have the liberty and flexibility to invest across the market spectrum, thereby providing the benefits of diversification in a true sense. This flexibility also allows Flexicap Funds to be dynamic in nature, while lowering the risks and still being able to capture different market cycles.

According to the regulatory norms for mutual funds, Flexicap Fund is the only fund category that does not have built-in limits for investing in large-cap, mid-cap or small-cap companies and hence is flexible in a true sense. Not surprisingly, Flexicap Fund has become quite popular among the investor community and is currently the second-largest equity fund category after Large Cap funds.

What makes Flexicap Funds so popular?
To begin with, flexicap funds can be dynamic and change their weightage across different categories without worrying of breaching any regulatory cap or limit. While one may feel that it is not that great an advantage as there will always be many companies in each of the categories, at times the rally is not a broad one and only certain categories might be in demand. For example, it could be that after touching record highs, the benchmark indices and large-caps in general could move in a narrow range but the mid or small caps may continue to register an exponential rise. While category-specific funds may not be agile enough to capitalise on this trend, a Flexicap Fund could immediately re-balance its allocation and maximise investor returns.

All this becomes very important especially at a time when there is uncertainty amidst this Covid pandemic, geo-political developments, steep US Fed rate hikes, economic growth outlook amongst several others. In such a setting the built-in flexibility in terms of investment approach as seen in a Flexicap Fund could be handy.

Things to consider while choosing Flexicap schemes
Given the popularity of the category among the advisors and investors, almost all the major fund houses have an offering in this category. So, it is important to get the scheme selection right. For this, if you are unsure how to proceed, then seek the help of a financial advisor who will do the needful on your behalf. On the other hand, if you are a DIY investor, then check the historical track record of the fund and the fund manager. Look into how the fund manager has been able to capitalise on the gains from the broader market from time to time. Check if the allocation is model based and if yes what has been the track record of the same.

To conclude, flexicap is a category of equity funds which one can consider keeping as a core part of the equity allocation in a portfolio. Through a single fund, one gets access to complete market capitalisations which is otherwise not possible. Since this is an equity offering one should invest with a long term horizon.

Disclaimer: This article is authored by Ravjot Singh Anand, Founder at Benchmark Investments. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class