Should investors bet on the flexi-cap funds right now?
The markets valuations of small and mid-cap stocks are high, with certain segments showing signs of overheating. Large-cap funds, meanwhile, are showing reasonable valuations. In such a situation, experts say, flexi-cap schemes are ideal investment vehicles.
They invest across market caps, having safety with returns with a combination of the stable large cap funds and high growth mid and small cap funds.
Flexi-cap fund is a mutual fund category which can invest across market capitalizations. Unlike funds that are restricted to a specific market cap range like large-cap, mid-, or small-cap, flexi-cap funds can allocate their investments across a broad spectrum of market capitalizations based on the fund manager’s strategy and market conditions.
Flexicap funds have comparatively lower volatility than a small and mid-cap fund due to large cap component. But do flexicap funds make sense at the current juncture? Let’s find out-
Niket Shah, Fund Manager, Motilal Oswal MF tells us that few pockets of mid- and small-cap are extremely expensive and a lot of sectors are in the frothy zone. He believes that the real value is in the large cap at the moment but there are few stocks within small- and mid-cap where there is value like mobile component manufacturing, solar which can be few sectors to look at. He said, “Flexi-cap funds offer us a healthy combination of small-, mid- and large-caps where valuations are not expensive and there is balance with high quality mid- and small-cap. One can expect returns from 12-15% in this category in the long term.”
Sorbh Gupta, Senior Fund Manager- Equities, Bajaj Finserv MF also said that given the current situation, where valuation comfort varies significantly across large caps, midcaps and small caps, investing in flex caps is a more sensible choice and even few large cap funds. He said, “For investors, it becomes more challenging to move the allocation between different market caps because of tax incidence on redemption, with flexicap they can easily avoid this.”
Trideep Bhattacharya, President and CIO Equities, Edelweiss MF believes that large-cap valuations are at par with all-time average and mid and small cap are 20-40% higher than average ratios. He also points that at the moment earnings growth of mid and small cap is almost double than that of large caps. He said, “While investing there needs to be a balance looking at the market conditions and that is why flexicap can be a suitable pick. Flexicap funds offer low volatility and can give better risk adjusted returns in the current market situation. One can expect 10-15% returns in the long run from this category.”
Most fund managers also believe that sector selection and stock picking become very important while allocating in a flexicap fund. Apart from this corporate governance assessment and company values are also taken into consideration by a fund manager before finalising the composition of the fund.