All you wanted to know about Flexicap Funds

What are Flexicap Funds?

Flexicap funds are diversified equity mutual fund schemes which can invest across market cap segments. There are no upper or lower limits with respect to allocations to any market cap segment. The fund managers of these schemes can invest any percentage of their assets in any market cap segment viz. large cap, midcap and small cap according to their market outlook.

Background of Flexicap Funds

Flexicap Funds as an equity fund category was formally introduced by SEBI in November 2020. However, diversified equity funds with flexicap strategy had always existed and have always been one of the most popular equity funds along with large caps. When mutual fund categories were formally re-classified by SEBI in 2017, the category Multicap Funds had a flexicap mandate. In other words, Multicap Funds, prior to November 2020 could invest across market cap segments without any market cap segment restrictions with regards to allocations.

In November 2020, SEBI changed the mandate of Multicap Funds to make it true to label. SEBI mandated that Multicap Funds must invest 25% of their assets each inlarge cap (top 100 stocks by market cap), midcap (101^st to 250^th stocks by market cap)and small cap stocks (251^st and smaller stocks by market cap).

The reason behind making this change was that, many Multicap Funds, over the last couple of years, had disproportionately large allocations to large cap stocks. As such, many Multicap Funds resembled Large Cap Funds in their risk / return characteristics and hence were not true to label i.e. Multicap.

Further, SEBI introduced the category Flexicap Funds which gave flexibility to fund managers to invest across market cap segments. Many Multicap Funds promptly changed their names to Flexicap Funds to essentially continue with the same investment strategy. However, some Multicap Funds changed their fundamental attributesto reflect SEBI’s new multicap mandate. The changes made by SEBI make sense from the point of view of retail investors, since the names Multicap and Flexicap Funds now represent the true investment characteristics of the schemes.

Difference between Multicap and Flexicap Funds

• Multicap Funds must invest 25% - 50% of their assets in large cap stocks, 25% - 50% in midcap stocks and 25% - 50% in small cap stocks.


• Investors must understand that Multicap Funds will have at least 50% of their assets in midcap and small cap stocks; therefore, you should invest according to your risk appetite.


• Flexicap Funds can invest 0 – 100% of their assets in any market cap segment viz. large cap, midcap and small cap.


• Managers of Flexicap Funds will decide on market cap allocations, depending on their market cap outlook.


• Investors must also understand that Flexicap Funds will not be less or more risky, than Multicap Funds across all market conditions. However, in certain market conditions e.g. bull market tops, bear markets etc, Flexicap Funds may have less mid and small cap allocations compared to Multicap Funds which must maintain minimum 50% allocations to mid and small caps irrespective of market conditions.

Why invest in Flexicap Funds?

• Winners rotate across market cap segments: One market cap segment cannot keep outperforming or underperforming for a long time. Historical data shows that winners rotate across different market cap segments – see the chart below. Flexicap fund managers can create alphas by prudently rotating allocations to different market cap segments based on their outlook.
  
  

  Source: NSE, Advisorkhoj Research (as on 30^th June 2021). Large Cap: Nifty 100 TRI, Midcap: Nifty Midcap 150 TRI, Small Cap: Nifty Small Cap 250 TRI. Disclaimer: Past performance may or may not be sustained in the future.

  
  


• Greater scope of alpha creation in mid / small caps compared to large cap funds: The chart below shows the annual category average returns of Large Cap and Flexicap Funds over the last 5 years. Large cap funds invest at least 80% of their assets in large cap stocks. Large cap stocks have high percentage of institutional ownership, are more researched and therefore have better price discovery. Hence scope of alpha creation is less in large cap compared to midcaps and small caps, which are less researched. Fund managers may be able to find quality mid and small cap stocks at attractive valuations, thereby creating alphas for investors over long investment horizons.
  
  

  Source: Advisorkhoj Research (as on 21^st July 2021). Disclaimer: Past performance may or may not be sustained in the future.

  
  


• Less volatile than mid and small caps: The chart below shows the annual category average returns of Midcap, Small Cap and Flexicap Funds over the last 5 years. Mid and small cap funds invest at least 65% of their assets in midcap and small cap stocks respectively. While mid and small caps tend to outperform large caps in bull markets, they tend to be much more volatile than large caps. Flexicap Fund managers have the flexibility to quickly shed risks in volatile markets and reduce downside risks for investors.
  
  

  Source: Advisorkhoj Research (as on 21^st July 2021). Disclaimer: Past performance may or may not be sustained in the future.

  
  


• Ideal for retail investors: Prudent financial planning calls for diversification across all asset categories. While more experienced or informed investors can decide how much exposures they want to large caps, midcaps and small caps in their investment portfolios, Flexicap Funds are ideal for investors who are not able to decide how much allocations they should have towards each market cap segments and want the fund managers to decide on market cap allocations. A large majority of retail investors may fall in the second category. Flexicap Fund managers aim for long term capital appreciation while trying to limiting downside risks in the short term.


• Ideal for SIPs: Systematic Investment Plans can take advantage of price volatility to reduce the average cost of acquisition (Rupee Cost Averaging). Since Flexicap Funds are more volatile than large caps, they are more suitable for investment through the SIP route.
  
  The chart below shows the category average annualized SIP returns (XIRR) of monthly SIPs in Large Cap and Flexicap categories. You can see that Flexicap SIP XIRRs were 100 to 170 bps higher than Large Cap SIP XIRRs. Over long investment tenures, this can result in significantly higher wealth creation due to the power of compounding. Just to give you a sense, for a Rs 10,000 monthly SIP, 1 – 1.5% higher XIRR means Rs 12 – 13 lakhs of additional profit over 10 year investment horizon.
  
  

  Source: Advisorkhoj Research (as on 21^st July 2021). Disclaimer: Past performance may or may not be sustained in the future.

  
  

Who should invest in Flexicap Funds?

• Investors who want capital appreciation over long investment horizon


• Investors with high to very high risk appetites


• Investors who have at least 5 years plus investment tenures


• They are suitable for investors who want to invest from their monthly savings through SIP for their long term financial goals like children’s higher education, marriage, retirement planning, wealth creation etc


• You can also invest in lump sum if you are ready to remain invested for the long term. If you are worried about short term volatility in the current environment, you can invest in Flexicap Funds through 3 to 6 months STP.

You should consult with your financial advisor, if Flexicap Funds are suitable for your investment needs.