What are Flexicap mutual funds?

Diversification is one of the crucial factors that need to be considered when investing, isn’t it? Keeping that in mind, in 2020, SEBI introduced a new fund category in the mutual fund industry: Flexicap fund. This fund will not only help the investors diversify their investments wisely but also reduce the risks and optimize the returns. This article will help you understand what this new category of the fund is, how it works, its features, objectives, and more.

What are Flexicap Mutual Funds?

Flexicap funds are open-ended dynamic equity schemes that can invest across any market capitalization without any set limit but the minimum exposure into equities and equity-related instruments has to be 65% of the total AUM of the fund.

This means the fund can have any ratio of stocks from different market capitalizations at a given point in time. Unlike Multicap funds, where the proportion of largecap, midcap, and smallcap stocks are fixed Flexicap can have different proportions of these stocks depending on different factors.

The flexibility in this fund ensures that the scheme is well diversified across sectors and can change the asset allocation according to market conditions.

Purpose of Flexicap Mutual Funds

You may be wondering why Flexicap funds were introduced when multicap funds were already present in the market. As multicap funds also offer the required diversification across different market capitalizations but the Flexicap fund’s objective is different from that of multicap funds.

• The primary objective of these funds is to offer flexibility to the investors and fund managers to allocate funds across stocks of different market capitalization as per market movement.
• Flexicap funds' next objective is to offer freedom to the fund managers to choose different investment styles and strategies depending on the need of the hour.
• The third objective of these funds is to offer both aggressive and conservative investors a solid investment instrument that can suit their investment portfolio and profile.

How Does Flexicap Mutual Funds Work?

The minimum exposure into equity is fixed for Flexicap funds, which is 65%, but it is dynamic. So, it is up to the fund manager how much of the assets of the fund/ scheme he or she allocates to equity over and above 65%.

The allocation amongst the market capitalization is also dynamic and can change depending on the market scenario. For instance, if a Flexicap fund has (suppose) 90% of the asset invested into equity. Now out of this 90%, 50% is invested in largecap companies while 30% is in smallcap and 20% is in midcap. This is when the market is volatile and bearish.

Now in a bull market when the smallcap and midcaps are rising significantly, while the largecap stocks are growing at a slower pace, Flexicap funds, can change the asset allocation and shift more of the AUM into smallcap and midcap while reducing the exposure into largecap stocks. This will help the fund encash the bull market when the small and midcap stocks grow. In contrast, during the volatile and bearish markets, largecap stocks remain comparatively less affected, and thus, can offer a cushion to the fund help in optimizing returns, and minimize risks.

Example of a Flexicap Mutual Fund

Here are some of the most popular Flexicap funds in India –

Advantages & Disadvantages of Flexicap Mutual Fund

Let’s now see the advantages and disadvantages Flexicap funds have –

Advantages 

• Dynamic Nature: Flexicap funds do not restrict the fund manager to any set rule of investment. As there is no particular ratio in which the asset of these funds has to be divided, the fund manager has the flexibility to allocate funds as per market conditions. This makes these funds highly dynamic and this in turn helps in optimising returns as the funds can encash the market conditions and also protect from market slowdowns.
• Diversification: This goes without saying that Flexicap funds offer great diversification benefits to investors. Investing in these funds can itself help the investors invest across different stocks of varied market cap.
• Fund manager’s freedom: The fund managers are free to choose different investment strategies and styles of investment for these funds. This helps in choosing the right strategy at the right time and can change the same when needed. It helps in mitigating risk further.
• SIP and Lumpsum Investment Options: Flexicap funds offer both SIP and lumpsum investment options. This helps different types of investors invest according to their investment goals and budget.
• Liquidity: Flexicap funds do not have any lock-in period and since the fund invests in stocks and other instruments according to the market conditions, the liquidity quotient remains higher. 

Disadvantages

• Time Horizon: If you have a short-term investment goal, then Flexicap funds are not for you. People with long-term investment goals should invest in these funds.
• Risks: As the major portion of the asset under the manager of these funds is invested into equity, the risk quotient is high. So, these funds are suitable for risk-taker investors.
• Market timing and fluctuations: These funds involve constant monitoring of the market as entry and exit for these funds are crucial. The fund manager needs to be prudent with the market movement to allocate assets according to the market scenario.
• Higher expense ratio: As a lot of effort has to be put in by the fund manager to maintain these funds, usually the expense ratio is a bit higher for these funds. If the expense ratio is too high, then it can eat up the returns.

Conclusion

Thus, investors looking to invest in a dynamic fund with flexibility in investment strategy, and style, suitable for long-term investments, can consider Flexicap funds in their investment portfolio. However, they need to keep in mind that the equity exposure of the fund also bears a risk quotient, and that is why investors must assess all the pros and cons before investing.