Flexi cap funds: A balanced approach to dynamic asset allocation

Posted On: 26 March 2024

Flexi cap funds can help investors balance potential growth and relatively stability as compared with other equity funds. These funds allocate assets across various market capitalizations and can alter their portfolios in response to the market performance of each segment. Let’s take a closer look at flexi cap funds to understand their asset allocation strategy.

Table of contents

What are flexi cap mutual funds?
Flexi cap fund principles for dynamic allocation
Factors considered in asset allocation of flexi cap funds
Advantages of asset allocation in flexi cap funds
Performance analysis and principles of flexi cap funds
Bajaj Finserv Flexi Cap Fund asset allocation strategy
What Bajaj Finserv Flexi Cap Fund does not invest in?/a>

What are flexi cap mutual funds?

Flexi cap mutual funds are a type of equity mutual fund in India that can invest in companies across market capitalisations – large-cap, mid-cap, and small-cap – without any mandatory minimum allocation to a particular segment. This flexibility allows fund managers to dynamically adjust their investment strategies based on market conditions, economic outlook, and company performance, potentially optimising return potential.

The primary advantage of flexi cap funds is their versatility. By not being confined to a specific market cap, these funds can leverage opportunities across the market spectrum. For instance, if the fund manager believes that mid-cap or small-cap stocks have better growth prospects, they can allocate a higher portion of the fund's assets to those segments. If market conditions change, they can change the allocation ratio accordingly.

Flexi cap funds are suitable for investors looking for a diversified portfolio with the potential for higher returns compared to traditional large-cap funds. However, they also come with higher risk due to their exposure to mid and small-cap stocks, which tend to be more volatile.

Flexi cap fund principles for dynamic allocation

Flexi cap funds work on a simple yet effective principle: diversify investments across large, mid, and small-cap stocks. This allows the fund to tap into the growth potential of small and mid-cap stocks while relying on the relative stability of large-cap stocks. Further, the allocation dynamic – that is, it can change based on market conditions and fund manager insights – making these funds flexible and adaptive.

Factors considered in asset allocation of flexi cap funds

According to the Securities and Exchange Board of India, a flexi cap fund must invest at least 65% of its assets in equity and equity-related instruments. The fund can decide how it wants to allocate its portfolio within the three market capitalizations. The scheme can also make routine readjustments to its portfolio based on market trends.

Several factors influence the asset allocation in flexi cap funds:

Market trends: Fund managers keep a keen eye on market trends, analysing patterns and movements to decide the optimal investment proportion in various market caps.
Economic indicators: Economic factors, such as inflation rates, GDP growth, interest rates, and fiscal policies, are crucial in guiding allocation decisions. These indicators provide insights into the overall economic health and future market directions.
Company performance: The performance of individual companies, including their earnings, growth potential, and market positioning, plays a significant role in investment decisions. Fund managers assess these aspects to identify companies that offer optimal growth prospects.
Risk assessment: Adjusting the risk profile of the fund is a key consideration. This involves analysing market volatility, political stability, and global economic events that can impact market performance, and adjusting the allocation accordingly.
Sectoral analysis: An in-depth analysis of different sectors can help in identifying the sectors that may outperform or underperform in the current economic climate. This sectoral focus allows fund managers to potentially capitalize on emerging opportunities while seeking to avoid downturns in specific industries.
Regulatory changes: Changes in government policies and regulations can have a significant impact on various sectors and, in turn, influence asset allocation decisions.
Global economic conditions: In an increasingly interconnected world, global economic events and trends can have a major impact on domestic markets.
Demographic trends: Long-term demographic changes, such as urbanisation, changes in consumer behaviour, and population age structures, can influence market sectors differently and are considered for strategic allocation.
Technological innovations: Rapid technological advancements can disrupt traditional industries and create new investment opportunities. Keeping up with these changes helps in aligning the fund's portfolio with future growth areas.

Advantages of asset allocation in flexi cap funds

Asset allocation in flexi cap funds offers several advantages:

Balanced risk: The diversification across market caps allows these funds to balance the risk-reward ratio, potentially mitigating the impact of market volatility.
Flexibility: The capability to shift allocation between different market caps as per changing market conditions makes these funds highly adaptable and responsive.
Potential for higher returns: By strategically capitalizing on market opportunities, these funds can potentially offer higher returns compared to more static investment strategies.
Professional management: Investors benefit from the expertise of experienced fund managers who make informed decisions based on comprehensive market analysis.

Performance analysis and principles of flexi cap funds

Performance analysis of flexi cap funds reveals:

Adaptability: These funds have shown resilience in various market conditions due to their adaptable nature.
Long-term growth: Over the long term, flexi cap funds have delivered consistent growth potential.
Diverse portfolio: The diversification ensures that the portfolio is not heavily impacted by the underperformance of a single sector.

Bajaj Finserv Flexi Cap Fund asset allocation strategy

Equity investments: The scheme primarily focuses on equity and equity-related instruments of large cap, mid cap, and small cap companies. This segment carries a relatively high risk profile, with a maximum allocation of 100% and a minimum of 65%.

Debt instruments: A percentage of the scheme can be invested in debt and money market instruments or units of mutual fund schemes. These are low to moderate risk, with allocations ranging from 0% to 35% depending on market conditions.

REITs and InvITs: Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) can also be part of the fund's portfolio, carrying a moderate to high risk. The fund can allocate between 0% to 10% in these instruments.

Derivatives: Investments in equity derivatives can be up to 50% of the equity assets for non-hedging purposes. Investments in fixed income derivatives can reach up to 10% of fixed income assets for non-hedging purposes.

Foreign securities and overseas ETFs: The scheme permits investments in foreign securities and overseas ETFs, adhering to guidelines set by SEBI and RBI. These can constitute up to 35% of net assets, with a cap of US $100 million for foreign securities and US $50 million for overseas ETFs. Currently, investment in overseas securities cannot be undertaken since the limits are not available. However, as and when the investment limits become available, this option can also be evaluated by the scheme.

Stock lending: The fund may invest up to 20% of its net assets in stock lending but will not allocate more than 5% of the scheme’s net assets in securities lending through one intermediary.

Repo transactions in corporate debt securities: The gross exposure to repo transactions in corporate debt securities is capped at 10% of the net assets of the scheme.

Inter-scheme investments: The fund can also invest in other schemes under the same AMC or different AMCs without charging fees. But the aggregate inter-scheme investment across all schemes should not exceed 5% of the net asset value of the fund.

What Bajaj Finserv Flexi Cap Fund does not invest in?

The scheme will not invest in certain instruments with special features and will avoid credit enhancements and structured obligations. The cumulative gross exposure across all assets should not exceed 100% of the net assets of the scheme. Should the asset allocation fall outside its specified limits, due to passive breaches, the fund manager will rebalance it within 30 business days.

Conclusion

Flexi cap funds, with their asset allocation strategy, present a suitable option for investors looking for diversified growth opportunities. While they are subject to market risks, their adaptability and potential for growth make them worthy of inclusion in a well-rounded investment portfolio. If you’re looking to invest in a Flexi cap fund, you can consider the Bajaj Finserv Flexi Cap Fund. The fund’s investment objective is to generate long-term capital appreciation by investing predominantly in equity and equity related instruments across market capitalisation. However, there is no assurance that the investment objective of the Scheme will be achieved. Consult a financial advisor when possible before making major investment decisions.

FAQs:

What is the primary objective of asset allocation in flexi cap funds?

The primary objective is to optimise the return potential and mitigate volatility by adjusting the asset mix across various market caps based on market conditions and risk assessments.

How do flexi cap funds differ from other types of mutual funds?

Flexi cap funds are unique in their unrestricted investment across large, mid, and small-cap stocks, unlike other funds that offer fixed allocations for specific market caps.

Can flexi cap funds switch between different market sectors?

Yes, flexi cap funds have the flexibility to switch between different market sectors, adapting to changing market trends and opportunities.

How do flexi cap funds balance risk and return?

Flexi-cap funds seek balance risk and return through dynamic asset allocation and diversification. Fund managers adjust exposure between large, mid, and small-cap stocks based on market conditions to mitigate risk and enhance return potential. For instance, they may increase exposure to small or mid cap stocks during bullish phases and may increase exposure to less volatile large caps during downturns to mitigate losses.

What factors influence the asset allocation of flexi cap funds?

Flexi-cap fund managers make asset allocation decisions based on market trends, economic indicators, valuation analysis, investment philosophy, and the scheme’s risk profile. They adjust exposure to different market caps depending on market conditions, economic growth, interest rates. Within each market cap too, they may buy or sell stocks because of performance and valuations. The fund manager's experience and investment style also significantly influence allocation decisions.

Are flexi cap funds suitable for long-term investment?

Flexi-cap funds can be suitable for long-term investment due to their flexibility, long-term growth potential, and risk-return balance. By investing across market capitalizations, they offer opportunities for growth and help manage short-term fluctuations. A long-term horizon also allows investors to benefit from compounding and mitigate the impact of short-term volatility.

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 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.