Flexi cap vs large cap funds: Which is better for long-term investment?

Many enthusiastic investors seeking a suitable investment option often find themselves confused between flexi cap funds and large cap funds. Both investment options come with their distinct attributes and benefits, and each presents a unique approach to potential long term wealth creation.

However, before you make a decision that can shape your financial future, let us have a brief look at the details of flexi cap funds and large cap funds. Here, we will understand their fundamental differences and explore which one might be a better fit for your investment goals.

• Table of contents

1. What is a flexi cap mutual fund?
2. Advantages of flexi-cap funds
3. What is a large cap mutual fund?
4. Advantages of Large-Cap Fund
5. Difference between large cap and flexi cap funds
6. Large cap and flexi cap funds: Which is better for long term?
7. Bajaj Finserv Flexi Cap Fund

What is a flexi cap mutual fund?

Flexi cap funds are a category of mutual funds that offer fund managers the flexibility to invest in stocks across market capitalization, i.e., large, mid, and small cap companies. Thus, flexi cap funds are not bound by rigid restrictions and can adjust their asset allocation based on market conditions, economic trends, and potential growth opportunities.

The main objective of flexi cap funds is to seek long term capital appreciation by diversifying across a wide range of companies and generate relatively better returns for investors while mitigating risks pertaining to equity investing.

Advantages of flexi cap funds

Flexi cap funds offer several advantages. These include:

• Diversification across market caps:Flexi cap funds invest across large, mid, and small-cap stocks, allowing for a well-diversified portfolio that reduces the risk and restrictions associated with a single market cap category.
• Risk-reward balance: By including mid- and small-cap stocks, flexi cap funds offer the potential for higher long-term growth compared to funds focused solely on large caps. At the same time, they benefit from the relative stability of the large-cap section of the portfolio.
• Flexibility to adapt to market conditions: Fund managers can adjust the allocation between large, mid, and small caps based on market trends and opportunities, potentially optimising returns during varying market cycles.
• Professional management: Flexi cap funds are actively managed by professionals who make strategic investment decisions, offering investors the advantage of expertise in selecting and adjusting stock allocation.

What is a large cap mutual fund?

Large cap funds belong to a category of mutual funds that focus on investing primarily in companies with a large market capitalisation. These companies are industry giants, often well-established, with a proven track record of stability and steady growth.

The core objective of large cap funds, therefore, is to provide investors with a relatively stable and consistent return on their equity investments, making them an attractive option for risk-equity investors.

Advantages of large cap funds

Here are some advantages of large cap funds:

1. Lower volatilityLarge cap funds invest in well-established companies with strong track records, which are typically more stable and less volatile than mid- or small-cap stocks.
2. Long-term growth potential: Large cap companies often offer consistent growth due to their established market presence, which can lead to relatively predictable returns over the long term.
3. Liquidity:Large cap stocks tend to have high trading volumes, ensuring that investors can buy and sell shares more easily, providing liquidity and flexibility in their investments.
4. Resilience during economic downturns: Large cap companies generally have stronger financials and can therefore be more resilient during downturns, providing a degree of cushioning against volatility.

Difference between large cap and flexi cap funds

Investment spectrum
The primary difference between large cap and flexi cap funds lies in their investment spectrum. Large cap funds focus solely on blue-chip companies with large market capitalization, while flexi cap funds have the flexibility to invest across market capitalisations, diversifying their portfolio to include mid and small-cap stocks alongside large-caps.

Returns on investment
Large cap funds are considered relatively more conservative due to their investments in stable and established companies. While they may offer potentially steady returns, they might not have the capacity for high growth as seen in flexi cap funds, which have a broader scope for capital appreciation through exposure to emerging businesses and sectors.

Risk tolerance
Investors with a higher risk appetite and a long-term investment horizon may find flexi cap funds more appealing, as these funds offer the potential for better returns, although with relatively higher volatility. Conversely, risk-averse equity investors may prefer the stability of large cap funds, where the risk of capital erosion is relatively lower as compared with flexi cap funds.

Diversification approach
While both funds aim for portfolio diversification, flexi cap funds offer a broader diversification across market capitalization and segments. Large cap funds, by nature, have a more concentrated portfolio, as they focus on a limited number of large-cap stocks.

Comparison of Large Cap Funds and Flexi Cap Funds

Criteria	Large Cap Funds	Flexi Cap Funds
Portfolio composition	Must invest at least 80% of the portfolio in large cap companies	Must invest at least 65% of its portfolio in equity, can invest in companies across market capitalisation
Management style	Actively managed, but fund manager must ensure exposure mainly to large cap stocks	Dynamically managed; fund manager can flexibly adjust the allocation between large, mid and small cap stocks
Volatility	Relatively lower volatility because of investments in well-established large cap companies	More prone to volatility owing to small and mid cap investments
Growth potential	Has potential for stable returns as it invests in blue chip companies	Has a higher growth potential because of the presence of mid and small cap companies that are in their expansion phase
Suitable for	Equity investors seeking long-term growth potential with risk mitigation	Investors comfortable with high risk in exchange for higher long-term return potential

Large cap and flexi cap funds: Which is better for long term?

Determining which type of fund is better depends on several factors, including your investment objectives, risk tolerance, and investment horizon. Neither option is clearly superior as each caters to different investor preferences and market conditions. Here are a few points you may take into consideration when deciding between a large cap and flexi cap fund:

• If you seek stability and a relatively lower level of risk, large cap funds may be a suitable choice for your portfolio.
• On the other hand, if you possess a higher risk tolerance and are willing to embrace market fluctuations for the potential of higher returns, flexi cap funds could be a more suitable option.
• Some financial experts also advise investors to opt for a combination of both large cap and flexi cap funds. By doing so, they can strike a balance between relative stability and growth potential.

Bajaj Finserv Flexi Cap Fund

Investing to grow wealth can be both challenging and a valuable learning experience. Fortunately, the thriving Indian market offers numerous opportunities for investors. Bajaj Finserv AMC has introduced the Bajaj Finserv Flexi Cap Fund. This scheme adopts a strategic megatrend investing approach, targeting long-term growth by investing in companies well-positioned to capitalise on significant global trends. These megatrends encompass high-growth sectors like technological advancements, consumerism, and urbanization. The fund takes a flexible asset allocation approach, which enhances its ability to tap into the potential of these megatrends.

In essence, the Bajaj Finserv Flexi Cap Fund offers investors exposure to the potential growth industries of the future. However, it is always prudent to consult a financial expert before making any investment decisions.

Conclusion:

While flexi cap funds offer investors the versatility of exploring various market segments, harnessing the potential of emerging companies and sectors, large cap funds provide relative stability in equity investing through investments in well-established industry giants. Ultimately, the choice between flexi cap and large cap funds boils down to your individual financial goals, risk appetite, and investment horizon. Whichever path you choose, always remember to conduct thorough research, seek professional advice, and align your investment decisions with your long-term aspirations. Also consider using a lumpsum investment calculator for help with investment planning. This tool can help you estimate the potential size of your final corpus based on your investment amount, tenure and expected returns. You can use this insight to adjust your financial strategy, if needed.

FAQs

What is a flexi cap fund, and how does it differ from a large cap fund?

A flexi cap fund invests in stocks across different market capitalizations, including large, mid, and small-cap companies. On the other hand, large Cap funds focus exclusively on established large-sized companies.

What are the key benefits of investing in a flexi cap fund?

Flexi cap funds offer diversification across market capitalization and segments, potential returns due to exposure to mid and small cap stocks, and flexibility to adapt to changing market conditions.

How should investors decide between a flexi cap fund and a large cap fund?

Investors should consider their risk tolerance, investment goals, and time horizon. Those seeking higher growth potential and are comfortable with relatively higher risk may prefer flexi cap funds, while risk-averse equity investors seeking relative stability may opt for large cap funds.

Can I invest in a flexi cap fund for the long term?

Yes, a flexi cap fund can be a suitable option for long-term investments. In general, a multi-year investment horizon is recommended for equity funds because markets can be highly unpredictable in the short term. Moreover, a longer investment cycle also gives your wealth to time to compound, resulting in significant growth potential

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.