In India, there are different types of mutual funds that are available for you as an option for investment. Each of these different mutual fund schemes is known for coming with its own set of advantages. And they are known for catering to different investment needs. Apart from advantages, each of these mutual fund variants also comes with different levels of risks. So, before signing up for any one of the mutual fund schemes, it is very important on your part to determine your risk appetite. Risk appetite can be defined as the capacity you have for taking investment risks. One of the prominent examples of different types of mutual fund schemes is equity mutual funds.
As the name suggests, equity funds are known for investing in equities. As they allocate funds to equities, these schemes are known for offering higher returns to their investors. Thanks to this feature, they are one of the preferred variants of mutual funds. Just like in the case of mutual funds, equity funds also come with different variants. One of them is flexi-cap funds.
What are flexi-cap funds?
One of the different types of equity funds, flexi-cap funds allocate funds to companies that are found across the different market capitalisations. This might give the impression that these funds are just like multi-cap funds. But they are different from multi-cap funds in one particular way. In a multi-cap equity fund, a fund manager is required to adhere to the 25-25-25 rule while allocating funds. Under the 25-25-25 rule, the manager needs to maintain 25% each in small-, mid-, and large-cap stocks.
Flexi-cap funds are also known for enabling the diversification of your investment across businesses that are a part of different market capitalisations. This is done to mitigate risks and thereby lower the chances of volatility. For these funds, a minimum of 65% of total assets are allocated to equities and their related instruments.
How do flexi-cap funds work?
The fund managers who are responsible for the upkeep of a flexi-cap fund can invest in companies of all sizes, i.e., market capitalisations without any restrictions. Therefore, without any limits (like is the case for multi-cap funds), fund managers can allocate funds to high-, mid-, and small-sized companies to lower volatility. While investing, fund managers look for small- or mid-sized companies with the capacity for growth and businesses with strong balance sheets.
What are the benefits associated with flexi-cap funds?
Some of the reasons that you should consider signing up for flexi-cap funds are:
- These funds are managed dynamically:
Flexi-cap funds are known for allocating funds to stocks that are part of different market capitalisations. Through these funds, your money is exposed to different industries and sectors, and that too without any restrictions. These funds are very helpful in building a diversified mutual fund portfolio that can withstand all market conditions.
- These funds are not as risky as mid- and small-cap equity funds:
Generally, flexi-cap funds are known for having sufficient exposure to large-cap stocks. This is known for protecting your mutual fund portfolio from the volatility of the equity market. This results in risk-adjusted returns higher than those offered by mid- and small-cap funds.
- More than one investment style is followed:
This type of equity mutual fund is known for combining different investment styles. Different styles of investments are combined with the aim to maximise investment returns. For instance, the value style of investment is known for focusing on undervalued stocks, and the growth investment style is known for focusing on growth opportunities.
Is it possible that flexi-cap funds can replace large-cap funds?
While it may not replace large-cap funds, flexi-cap funds are definitely more beneficial. While large-cap funds are known for only investing in companies with a good reputation, flexi-cap funds are known for investing in companies of all market capitalisation. So, in case a mid- or small-sized business were to perform well, you can enjoy the benefit of the good performance. Under large-cap funds, you can’t take advantage of the good performance of small- or mid-sized companies.