FLEXI CAP FUNDS
In the best interest of mutual fund investors, the market watchdog SEBI has been implementing a chain of changes and among them, the concept of Flexi cap funds is introduced. For any equity-based mutual fund to be classified as a Flexi cap fund, it needs to comply with a guideline which is that a minimum of 65% of the total assets needs to be maintained in equity securities. Further, there exists no restrictions like the new multi-cap funds have regarding the allocation of funds.
INTRODUCTION OF THE CONCEPT
After the SEBIs change in regulations and mandates for the multi-cap mutual fund category which quotes that fund managers are to invest at least 25% of the assets each in large, mid, and small-cap stocks from this January, managers out forth their opinion and concerns on the quantum of risk involved in investing 25% in mid and small-cap stocks and requested the introduction of such category. In view of the risk posed by the new set of mandates for multi-cap funds, existing schemes were allowed to reclassify themselves as Flexi-cap funds.
In the circular, SEBI said that ‘Mutual funds have an option to opt for conversion from an existing scheme into Flexi cap fund subject to compliance with the mandate requirement for change in fundamental attributes of the scheme in terms of Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996.
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HOW DOES FLEXI CAP FUND WORKS?
Unlike other categories of funds like mid-cap or small-cap, the size of a company is not a constraint for flexi-cap funds. These funds may invest in any entity, regardless of the company’s size. These funds allow an investor to diversify their portfolio across companies of different market cap, thereby reducing overall risks. Here, the managers assess the growth potential of the entity regardless of its capitalization and invest the sum across various market segments and entities.
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BENEFITS OF FLEXI CAP FUNDS
As discussed, Flexicap funds are diversified equity-based funds that invest in companies across the market capitalizations & different sectors.
2. Ideal Mix:
These funds offer the investors an ideal mix of stocks that not only minimize the associated risk with market volatility but also provide potential good returns in the long run.
These firms are great for long-term goal planning that needs wealth creation.
4. Less Risky:
Investing in flexi cap funds is comparatively less risky when compared to a pure mid, or small-cap fund as the manager has the leeway to capture the best available opportunities in the market.
5. Asset class benefit:
Equity as an asset class holds the potential to generate long-term wealth and beat inflation by giving good returns.
RISKS ASSOCIATED WITH FLEXI CAP FUNDS
Flexi cap funds invest across market capitalization which makes them riskier than pure large-cap funds but less risky than pure mid and small-cap funds. While small caps have high return potential, they are prone to high volatility and thus possess high risk. If you are an aggressive investor looking to gain from across-market cap entities over a long tenure, you may consider investing in these.
RETURNS ON FLEXI CAP FUNDS
Flexi-cap funds offer a diversified portfolio which results in striking a balance between the risk and return aspects pretty well. Also, the fund manager can opt to assess the fund allocation and switch between different entities, industries, and sectors depending on the performance from time to time. This ensures that the investors earn good returns in the long term.
As of 26 March 2021, the average 5 year & 7-year category returns of flexi cap funds have been around 14.91% & 15.83%.
WHO SHOULD INVEST?
Investors seeking complete flexibility in terms of having their holdings without any restriction in terms of allocation to a particular capitalization can consider this mutual fund category. In other words, investors who want to invest in a diversified equity portfolio can comfortably go for flexi cap funds. In today’s scenario, when the Indian economy has technically charted into recession as per the recent RBI release, finding valuable mid and small-cap stocks can be difficult and challenging. In the near term, fund managers would have these funds more inclined towards the large-cap and with the improving situation, they would include mid and small-cap at good portions. So, while flexi cap funds with allocation in large-cap can help to offset the volatility to an extent, investors with a moderate to high-risk appetite and investment tenure of 5 years can go forward with investing in this mutual fund category.
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