Flexi Cap Funds: Key Benefits, Risks, And Returns Before You Invest

Flexi cap funds have steadily gained traction among Indian investors, emerging as the largest equity mutual fund category. Their appeal lies in the unique flexibility they offer. For investors, this means a single fund can provide broad market exposure, professional allocation, and long-term growth potential. But before you invest, it’s important to understand how these funds work, their benefits, risks, and whether they align with your financial goals.

What Is A Flexi Cap Fund?

A flexi cap fund is an open-ended equity fund which invests in stocks across market capitalisations, i.e. in large caps, midcaps, and small caps. There are no restrictions on the allocation to any market cap segment.

As per SEBI, these schemes need to invest a minimum of 65 per cent of their total assets in equity and equity-related instruments.

“From an investment manager’s perspective, it offers people freedom to choose any sector across the cap curve. From an investor’s perspective, they need not worry about cap curve or sectors since it is chosen by professionals,” says Sanjay Chawla, Chief Investment Officer - Equity, Baroda BNP Paribas Mutual Fund.

How Is It Different From Large-Cap, Mid-Cap, Or Multi-Cap Funds?

Flexi cap funds differ from large-cap, mid-cap, and multi-cap funds primarily in terms of investment flexibility and mandate. A flexi cap fund allows for a dynamic approach to allocation across market caps – the mandate is with the fund manager how they wish to allocate the assets across different market capitalisations depending on their view on markets.

Multi cap funds must compulsorily allocate a minimum of 25 per cent to each of the market cap categories, while large caps and mid-caps would need to invest minimum 80 per cent and 65 per cent in large cap and mid cap, respectively.

How Volatile Are These Funds

Flexi cap funds generally tend to have similar volatility to multi-cap funds. Their flexibility enables fund managers to adjust allocations in response to market conditions, thereby reducing risk during downturns. Multi-cap funds, with minimum fixed exposures across market caps, can be more volatile in comparison to flexi cap funds. Large-cap funds tend to be the least volatile, focusing on stable, established companies.

How Safe Are Flexi Cap Funds For Long-Term Investment?

"Flexi cap funds are ideal for long-term investment and can be part of an investor’s core portfolio," says Chawla.

The longer holding period enables the fund manager to capture various cycles and sector themes.  Over the long term, the short-term market blips smoothen out, which may lead to better wealth creation journey for the investor.

Returns To Expect In 5–10 Years

Since flexi cap funds invest across market caps and across diverse sectors, it would be fair to assume they effectively capture the broad economic growth of the country.

“Historically the nominal GDP growth rate has hovered between 9 per cent and 11 per cent over the longer time horizon. Over a period, corporate profitability tends to grow a little bit higher than the nominal GDP growth rate. Stock markets being slaves to earnings, we have witnessed flexi cap funds delivering similar returns. If there is derating or re-rating, we are likely to witness returns tracking earnings growth underpinned by economic growth in the country,” informs Chawla.

Who Should Invest In Flexi Cap Funds?

Investments in flexi cap funds can form part of the core portfolio allocation for all kinds of equity investors. The investment universe of companies for the flexi cap portfolios spans almost all the listed stocks. Therefore, flexi cap funds give investors exposure to a large part of the market and the Indian economy.

“Investors with medium to long-term investment horizons who are comfortable with risks associated with equity markets and are looking for dynamically-managed equity funds with exposure across market caps can consider investing in these types of funds,” suggests Chawla.

Ideal Investment Horizon

All equity fund investments should be for a minimum of 5 years. Historically that has been the market cycle. In that time horizon, the investment manager will effectively be able to navigate through the troughs and peaks of the markets to deliver risk-adjusted returns.

From a wealth management perspective, the ideal time period should be till your financial goals are met.

Are They Good For SIP Or Lump-Sum Investment?

Flexi cap funds are versatile and suitable for both SIP and lumpsum investments. It also depends upon what is your existing asset allocation and what should be your target asset allocation.  If your exposure to equity funds is low, then you may consider lump sum. However, if the investment flow is staggered in future, then SIP is the best option.

“Generally, investors should stagger their investments into equity mutual funds. For lumpsum investments, short term STPs (daily/weekly/monthly) can be considered. SIPs align an investor’s cash flow with investment discipline and are useful for regular and long-term investments into mutual funds. The decision regarding the method of investment should be made in cognizance of the financial goals and risk appetite of the investor,” says Chawla.

Precautions Before Investing In Flexi Cap Funds

When choosing any fund, you must look at the track record of the fund house and sponsor. While investing one must bear in mind that equity is inherently risky and you may witness drawdowns in shorter time horizon. Over a period, returns align with economic growth in the country. During such draw downs, one must continue one’s investment and if possible, top up. History has time and again shown that markets recover. True wealth is created when one invests consistently over a longer time horizon.