‘Flexi cap segment mostly delivered a balanced performance’

Cautious optimism - the oxymoron most often used in the investing parlance, perhaps brings out the best description for equity investor sentiments at this juncture. The relentless rally in global and domestic equity markets over the past 18 months after March 2020 drove key indices to their life-high levels. The bellwether index BSE Sensex recently touched the historic 60,000-mark. The onset of pandemic and subsequent announcement of humongous stimulus packages by key economies pumped up the liquidity levels which fueled a stronger global rally. Additionally, policy measures announced in India aided rectification of market skewness and resulted in a broad-based rally.

Quick analysis shows that while the small cap segment has emerged as a top performer in the 18-month rally, from a longer horizon since early 2018, the re-rating in the large cap segment has been better than that seen in mid caps and small caps stocks. While investors have been mostly happy with this turnaround, they get bogged down by questions like “ How far will this rally go?”, “ At these levels is it a safer option to continue to invest in large caps?”, “ Any scope for alpha to be generated in the small caps at these market levels?”, “Will midcap be a safer bet?”, “Should I wait on the sidelines?”.

With the current market rally taking no breather, we find high market valuation levels accompanied by gradual corporate earnings recovery and nascent economic growth uptick greatly contributing to investor concerns about the way forward. Nobody can precisely predict market movements or outperformance of market capitalization segments at any given point. Timing the market is both difficult and futile. Even tougher is timing the switch between market capitalization segments.

Solution? Go flexible. Invest in a mutual fund that allocates to market capitalization segments dynamically based on fundamental factors, relative /absolute valuation levels and evolving changes in the market.

While no single segment outperforms all the time, the flexi-cap segment represented by Nifty 500 index has mostly delivered a balanced performance (between large cap and mid/small cap).

Flexi-cap Funds – the Advantage of Flexibility
As the name suggests, the category follows a flexible approach when allocating to market capitalization segments in accordance with perceived growth opportunities offered by these segments. While the flexi-cap based funds have been around for long, SEBI named the category as Flexi-cap in 2020. As per definition, there are no internal limits / bifurcations in market capitalization allocation for this category.

Flexi-cap fund is for you if
Benefits


Category statistics:

• Second largest category within the equity funds with AUM over INR 2 trn (31st Aug 2021) across 28 funds.
• Over half of the Flexi-cap funds have 10+ years of track record with five funds having a vintage of 23 to 28 years.

The category follows dynamic allocation across market capitalizations. The market cap allocation trend in last 5 years highlights active management. From high allocation to midcaps in 2017, the category exposure to midcap dropped in 2019 only to increase it by 2021. Small cap allocation shows a similar trend.


Source: Morningstar, P2P data from August 2017 to August 2021. Market cap break up based on AMFI’s classification

Balanced risk-return profile –

A cross-category comparison of performance and associated risk reveals that flexi cap category risk-return profile stands higher than large cap category and lower than mid and small cap ones.

Flexi-cap funds are all-season products, offering a prudent solution to participating in broader markets. The dynamic nature and balanced risk-return profile of the product warrants inclusion in the core investment portfolio to cater to your long-term goals. Longer investment horizon helps tide interim volatility. Systematic investing for the long term through the SIP route is recommended to build a stable exposure to the fund category.

(The author is the head-equity, Franklin India Mutual Fund.)