Difference between Flexi Cap and Small Cap Funds

You might have heard the phrase ‘Never put all your eggs in one basket’. In essence, this is what flexi cap funds are all about. Investing in flexi cap funds can be an appealing option for people seeking a flexible investment opportunity, which can be constantly modified according to the prevailing market conditions. However, before diving into these funds, it's crucial to consider several factors that can influence your investment decisions. Here, we aim to highlight what are flexi cap funds and how are they different from small cap funds.

By understanding the nature of flexi cap and small cap funds, assessing your risk appetite, and analysing the fund's investment strategy, you can invest more effectively and increase your chances of achieving your financial goals.

• Table of contents

1. What are Flexi Cap Funds?
2. What are Small Cap Funds?
3. Flexi Cap vs Small Cap Funds: Know the Difference

What are Flexi Cap Funds?

Flexi-cap funds are a type of mutual fund that offers investors the flexibility to invest in companies across different market capitalisations. Unlike other funds that focus on specific categories or market cap – like large-cap or mid-cap stocks, flexi cap funds have the freedom to allocate their assets across the entire market spectrum. Thus, flexi-cap funds can invest in large-cap, mid-cap, and small-cap stocks based on the fund manager's assessment of market conditions and investment opportunities. The fund manager's expertise in selecting stocks across different market segments plays a crucial role in achieving these objectives.
In addition, the allocation can be adjusted dynamically as per the changing market trends and the fund manager's investment strategy. This allows flexi cap funds to provide investors with the advantage of diversification.

Read Also: Understanding Flexi-Cap Fund

What are Small Cap Funds?

Small-cap funds are a category of mutual funds that primarily invest in stocks of small-cap companies. Small-cap companies typically have a market capitalisation below a certain threshold and are ranked from 251 onwards in terms of full market capitalisation. Thus, small-cap funds aim to capitalise on the growth potential of smaller companies that may be less well-known but have the potential for substantial expansion.
However, it's important to note that small-cap funds come with a higher level of risk. Small-cap companies are generally more vulnerable to market volatility, economic downturns, and liquidity issues. They may also have limited resources, making them more susceptible to business failures or financial challenges. Therefore, investing in small-cap funds requires careful analysis, a long-term investment horizon, and a tolerance for higher volatility.

Read Also: What are small-cap funds, its features, and benefits?

Flexi Cap vs Small Cap Funds: Know the Difference

Flexi cap funds and small-cap funds are distinct categories of mutual funds with varying investment strategies and objectives. Understanding the differences between these two types of funds is essential for investors to make informed investment decisions.

• Investment focus: Flexi cap funds have the flexibility to invest across different market capitalisations, covering large-cap, mid-cap, and small-cap stocks. The fund manager can adjust the allocation based on market conditions and investment opportunities. Small-cap funds, on the other hand, specifically focus on investing in stocks of small-cap companies. These funds primarily target companies with lower market capitalisations, offering the potential for higher growth.

• Risk and return profile: Flexi cap funds seek to strike a balance between potential returns and risks by diversifying across different market segments. Small-cap funds tend to be comparatively more volatile and carry higher risks due to investments in smaller companies. Though small cap funds can offer the potential for relatively better returns, investors may have to face higher market fluctuations.

• Market exposure: Flexi cap funds provide investors with exposure to the entire market spectrum, covering large-cap, mid-cap, and small-cap stocks. This diversification allows investors to benefit from different segments of the market. Small-cap funds focus solely on the small-cap segment, and this limits their exposure to larger and more established companies.

• Investment approach: Flexi cap funds employ a flexible investment approach, enabling the fund manager to profit from market opportunities and allocate assets based on the prevailing market conditions. Small-cap funds typically follow a more focused approach, concentrating on identifying promising small-cap companies with the potential for high growth.

Conclusion

Before investing in either flexi cap funds or small-cap funds, it is crucial to consider several factors that can significantly impact your investment decisions. Understanding the potential risks and rewards associated with these funds is essential for aligning your investment goals. Additionally, investors must assess their risk tolerance and investment horizon to make a well-informed decision. Using a mutual fund compounding calculator calculator can also help evaluate the long-term potential of investments and set realistic goals.

FAQs

What are flexi cap funds?

Flexi cap funds are mutual funds that provide investors with the flexibility to invest in companies across different market capitalisations, covering large-cap, mid-cap, and small-cap stocks. They offer diversification benefits and the potential for long term growth.

How do flexi cap funds differ from small-cap funds?

Flexi cap funds have the flexibility to invest across market segments, while small-cap funds focus specifically on investing in stocks of small-cap companies. Flexi cap funds provide broader market exposure, whereas small-cap funds target the growth potential of smaller companies.

What factors should I consider before investing in flexi cap funds?

Before investing in flexi cap funds, evaluate your risk tolerance, investment goals, and time horizon to ensure they align with the potential risks and rewards associated with these funds.

Are flexi cap funds suitable for long-term investments?

Flexi cap funds can be suitable for long-term investments as they provide the flexibility to adapt to changing market conditions. However, it's important to carefully assess the fund's investment approach and your own investment objectives.

What are the potential risks of investing in flexi cap funds?

Flexi cap funds are subject to market volatility, and the performance may be influenced by the fund manager's stock selection. Additionally, the flexibility to invest in different market segments may expose investors to risks associated with specific capitalisations, such as the higher volatility of small-cap stocks.

Can flexi cap funds help in portfolio diversification?

Yes, flexi cap funds can help in portfolio diversification by providing exposure to companies across different market capitalisations. They can complement other investments in your portfolio and reduce concentration risk.

How should I choose between flexi cap funds and other investment options?

Consider your investment goals, risk tolerance, and time horizon. If you seek diversification and the potential for long term growth, flexi cap funds can be a suitable option. However, make sure to evaluate other investment options and consult with a financial advisor for personalized guidance.

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.