Having flexi-cap, multi-cap funds in your portfolio

India today is at the cusp of a new growth cycle. The best indicator of this is the Indian equity markets. With the anvil of new-age businesses entering the fold, we have seen a gradual evolution of the capital markets as we know it.

In the age of disruptors, enablers and adapters investors today have a plethora of opportunities at their disposal.

For mutual fund investors identifying the ideal equity portfolio to maximize their growth potential can pose a challenge. Getting into the portfolio nitty-gritty can be taxing for even the most seasoned mutual fund investors.

The flexi cap and multicap fund categories can be solutions for such investors looking at a one stop equity solution.

In an ideal scenario, investors expect a broad market flexicap or multicap fund to actively manage allocations in an ever-changing marketplace.

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The dynamic nature of the market means that opportunities can arise across sectors, themes and even market cap buckets.

Flexicap and multicap funds are designed specifically keeping in mind this market phenomenon. A high-quality fund performing fund would be one that latches onto opportunities regardless of where they lie as the fund manager aspires to create consistent long-term wealth.

Let us assume the example of Person ‘A’ who invests in large-cap companies with an aim to earn reasonable returns at lower exposure to risk. On the other hand, Person ‘B’ invests
in small and mid-cap companies due to the aggressive nature of their growth but the risk is moderately/relatively higher.

Can they invest in all three categories through a single fund?

As the name suggests, Flexi-cap funds offer flexibility to the fund managers to invest in large, small, and mid-cap companies giving them access to the entire market spectrum and opportunities to focus on fast growing sectors as well.

Flexi-cap fund managers have the freedom to determine the weightages/exposure levels across various market caps. There is no restriction on minimum exposure to large, midcap and small cap companies.

The risk-return trade-off is likely to be favourable in this case as one can anchor on the right inflection points in the market and the sectors. Investors are likely to bank on them as they help create a diversified portfolio under one fund.

Multi-cap funds need to have a minimum 25 per cent exposure under each bucket (large, midcap and small caps), ensuring that the portfolio is not overtly concentrated towards a particular market cap bucket.

Due to its large and varied investment universe, multi-cap funds offer the dual benefit of growth and risk-adjusted returns to the investors, making them one of the solution for long-term investment objectives and wealth creation. They are ideal for investors that have high risk appetite with a time frame of 5-7 years.

Investors are presented with the option to leverage opportunities presented by the large, small and mid-cap funds. However, there may be a phase in the market wherein the small or
midcaps or large caps don’t perform as anticipated.

Similarly, another economic or global crisis may hit, creating turmoil across markets. In such a scenario, minimum exposure across the three segments as offered by Multi-cap category gives an extra edge to the investor. Even if a particular category large/mid/small-cap is struggling in the volatile phase, the other two categories will provide an edge to the investors’ portfolio.

Multi-cap fund managers look at the opportunity offered by the large-cap companies while marshalling on the potential amplification in the mid-cap and small-cap companies in the
portfolio to provide returns. Investors looking to invest in growth stories across large, mid and small cap can consider multi-cap in their portfolio as one of the one-stop solution.

(The writer is CBO at Axis AMC.)