How Finology Selects Best Flexi Cap Funds?

Flexi-cap funds provide the flexibility to dynamically allocate assets across large, mid, and small-cap stocks, depending on market conditions. This adaptability makes them a preferred choice for investors looking for a balance of growth and capital safety, often with lower volatility.

Stability becomes more important than anything when you are investing for your goals. Even while picking stocks for Finology 30, we choose stocks that you can rely on for the long-term.

Flexi Cap vs Multi Cap - Which one is better?

Flexi-Cap Funds and Multi-Cap Funds both offer diversified equity investments but cater to different investor preferences and strategies. 

Multi-Cap Funds have a more balanced, predefined structure and more discipline in terms of asset allocation, requiring a 25% allocation to each category, large, mid, and small caps. This structured approach can appeal to those who aim for consistent exposure across all market segments. 

We prefer Flexi-Cap funds over Multi-Cap funds because - 

1. Flexi-cap funds have the flexibility to invest more in large-cap stocks, which helps cushion the impact when the market dips. 

2. On the other hand, Multi-Cap funds have to have mandatory regulatory exposure of at least 25% to large, mid and small-cap stocks, which makes the fund manager's job difficult, especially during downturns and stressful market situations, to navigate and mitigate risk.

3. Flexi-Cap funds offer the most flexibility to any fund manager. Active funds are meant to take a bet on the fund manager and we believe that if we are betting on the fund manager, then the bet should be taken on that manager who has the complete freedom to showcase his skills. 

Multi Cap funds have provided better returns compared to Flexi Cap funds.  In the last 3  years, multi-cap and flexi-cap funds have offered average returns of ~ 20.44%  & ~15.92%, respectively. However, the higher returns of Multi Cap come at a higher risk exposure to mid-cap and small-cap stocks at all times. While in good times, a multi-cap fund may outperform the flexi-cap fund, a multi-cap fund may perform poorly if any large, mid or small-cap category faces a downturn. In such a scenario, the flexi-cap fund manager would least have the flexibility to reduce allocation to the affected category.

According to a study by ET Money,  the rolling returns for Nifty small-cap funds underperformed the Nifty 100 (large-cap focused) on average rolling returns comparison over the years. Over 7 years as well, it did not outperform Nifty 100 by a healthy margin. This kind of scenario creates an unwanted risk exposure in a multi-cap fund where the fund manager is bound to stay exposed to the riskier small-cap segment even though the performance of the segment turns out to be below expectations. 

 Source: ET Money 

At the core of our investment philosophy is capital safety with growth, which ensures your investments have the potential to grow without exposing investors to unnecessary risks. Flexi-cap funds allow the fund manager to shift between different market caps– large, mid, and small, based on market conditions, making it easier to manage risks while aiming for steady growth. This dynamic allocation strategy enables better handling of market volatility and gives investors the advantage of balancing their portfolios efficiently.

In our opinion, Flexi-Cap funds are a smart choice. As an investor, you are not only investing in solid, established large companies but also benefiting from their adaptability to changing market dynamics. 

Our new approach: 

We have previously recommended a mutual fund in the flexi cap category. This time, we decided to explore more options to see whether any other category is comparable to our recommendation in the flexi cap category. We explored a few categories of funds where we have not recommended any funds in the past but believed could have been similar to flexi cap funds. We observed that Value Funds, Contra Funds and  Focused Funds could be good parameters for comparing against flexi cap funds.

These funds have similar categorisation and rationalisation of schemes to that of Flexi Cap funds. Just like Flexi Cap funds, these schemes have guidelines from SEBI to have at least 65% of their investments in equity and equity-related instruments. Focused Funds have added restrictions in that they are required to be focused on a maximum of 30 stocks. These funds also have the flexibility to invest in different market capitalisation segments, such as large-cap, mid-cap, and small-cap stocks, without stringent limitations.

So, this time, we decided to compare the best mutual funds among all these categories for our top pick.

Our selection criteria with the new approach -

To begin with, we screened 113 of the flexi, value, contra and focused funds and filtered funds that had a long-term performance track record of 10 years. This left us with 50 funds. Then, we filtered out by selecting how many of these funds were able to beat their benchmark rolling returns, Nifty 500 TRI, over the long term. 15 funds were unable to beat the benchmark. Next, we screened the remaining funds with expense ratios and got 18 funds that had a lower expense ratio compared to the average expense ratio of 0.80% of the remaining 35 funds. Considering AMC's reputation and the fund's history, we got our top 5 picks from our analysis category.

Among these 5 selected funds, one of the funds had the highest expense ratio. However, based on 10-year rolling returns, the fund performed better than other top 3 funds. Then we were left with just 2 funds. One had a lower expense ratio, and the other had a marginally higher expense ratio. Given the fund manager's return-generating ability, we consider the higher expense ratio to be justified. With this, we had our best flexi cap fund for this year. 

We have revealed our choice of flexi cap funds for 2025 in Recipe’s Free Reports section. Stay tuned!