Mutual Funds: Flexi-Cap Funds Inflows Surpass Rs 3,500 Crore In 2024 Alone; What Is Fuelling Surge?

When it comes to investing, flexibility is a vital trait, and in the world of mutual funds, flexi-cap schemes embody this characteristic. In August 2024, flexi-cap mutual funds experienced an inflow of Rs 3,513 crore, making them the second-most popular category among equity mutual funds. This influx, though substantial, was overshadowed by sectoral funds, which led the pack with an inflow of Rs 18,117 crore, according to data from the Association of Mutual Funds in India (AMFI). Flexi-cap schemes have increasingly become a favourite among retail investors.

What Are Flexi-Cap Mutual Funds?

Flexi-cap mutual funds are a relatively new category, introduced by the Securities and Exchange Board of India (SEBI) in November 2020. These funds are designed to invest at least 65% of their assets in equities and equity-related instruments. Unlike traditional mutual fund categories, flexi-cap funds have the liberty to invest across all three market capitalizations-large-cap, mid-cap, and small-cap-without any fixed proportion. This flexibility allows fund managers to adjust the portfolio in response to market conditions, optimizing potential returns.

With a total of 39 flexi-cap schemes in existence as of August 2024, the category boasts an impressive asset under management (AUM) of Rs 4,29,311.51 crore. This makes flexi-cap funds the second-largest in terms of AUM after sectoral funds, reflecting the significant trust and investment placed by retail investors.

Why Should Investors Consider Flexi-Cap Funds?

The unique flexibility of these funds is their biggest strength. Financial advisors often recommend flexi-cap mutual funds for the simple reason that they allow fund houses the freedom to invest across a range of stocks in any ratio, depending on the prevailing market scenario. This contrasts with multi-cap schemes, where fund managers are obligated to invest at least 25% in each of the three capitalization categories-largecap, midcap, and smallcap. The rigidity of multi-cap funds can sometimes limit their ability to fully capitalize on changing market trends, whereas flexi-cap schemes offer greater adaptability.

In flexi-cap funds, if largecap stocks are performing well, the fund manager can allocate more of the portfolio to these stocks. Conversely, if mid-cap or smallcap stocks show better potential, the fund can be rebalanced accordingly. This dynamic nature not only reduces risk but also enhances the opportunity for higher returns.

Flexi-cap funds have consistently demonstrated strong performance, often yielding double-digit returns across various tenures. As of August 2024, the category delivered a one-year return of 37.20%, significantly outperforming many other equity mutual fund categories. Over a five-year period, the annualized returns for flexi-cap funds stood at 22.04%.

For comparison, multi-cap funds also exhibited impressive returns, closely aligning with the performance of flexi-cap funds. However, the additional flexibility of flexi-cap funds to move freely between capitalization categories provides an edge in volatile or rapidly shifting markets. This flexibility has contributed to the growing interest from retail investors, as they seek to diversify their portfolios and capitalize on the potential for high returns.

The consistent inflows into flexi-cap mutual funds over the past several months indicate rising confidence in this investment option. August 2024 saw the highest inflow into flexi-cap schemes compared to previous months.

One of the key drivers of this trend is the adaptability of flexi-cap funds in the current market environment. The Indian stock market has seen a mix of performance across sectors, and having the ability to swiftly reallocate funds across largecap, midcap, and smallcap stocks provides an advantage. Fund managers can tilt portfolios to favour largecap stocks for stability or mid and smallcap stocks for higher growth potential based on market forecasts.

With the ongoing evolution of the market and economic conditions, experts believe that flexi-cap funds will continue to attract investors. The current trajectory suggests that these funds are poised to capture even more market share in the mutual fund industry, especially as retail investors become more educated about the benefits of flexibility in investment strategies.

Flexibility

The inherent flexibility of flexi-cap funds makes them particularly well-suited for long-term investors. In a constantly shifting market, being able to adjust portfolios across various market capitalizations without restriction is a powerful tool. By giving fund managers the autonomy to decide where and when to invest, flexi-cap funds have become a symbol of modern, strategic investing.