Flexicaps Reduce The Cost Of Being Wrong

As markets were settling back slowly to normalcy at the end of 2025 after a 15-month volatile period, global factors have come back to hurt key indices. Geopolitical tensions involving the US (Venezuela, Iran etc.), a weak rupee, and the absence of any indications of an India-US trade deal resulting in persisting penal tariffs have negated the positivity around strong domestic GDP growth, low inflation, modest earnings recovery etc.

As the broader markets turn choppy again with FPIs continuing to sell heavy, several pockets with valuation comfort have emerged across market capitalisations.

In such a scenario, taking a flexicap approach to investing can be rewarding over the long term. A smart approach that is process-driven by incorporating several key factors can make for a robust flexicap strategy. For retail investors, mutual funds would be the best way to take exposure to a flexicap style.

Gains From Flexibility

Typically, a flexicap style of investing takes exposure across large, mid and small cap stocks depending in market conditions. There is considerable flexibility on allocating to individual market caps. Given the varied choices available across market caps, a flexicap style by itself ensures reasonable portfolio diversification. A diversified investment portfolio ensures considerable risk mitigation to the holdings.

For example, if there are too many negative macro factors and weak sentiments at play, large caps may help prevent portfolio downside as these companies tend to have better risk management capabilities. Large caps provide stability in such situations as they are less volatile compared to mid and small caps. They provide better returns in such situations.

On the other hand, when the triggers and sentiments are very positive, fundamentally sound mid and small caps will have solid re-rating potential. They could possibly deliver multi-bagger returns if their profitability remains strong. Thus, in an upmarket, mid and small caps ensure healthy capital appreciation.

Thus, a flexicap portfolio is designed to deliver well across market cycles over the long term.

Following a smart process

Fund houses managing active flexicap strategies follow a disciplined, well-defined investment process.

To select the right set of stocks, a top-down approach for large caps and a bottom-up approach for mid and small caps becomes necessary.

A top-down approach for selecting large caps incorporates factors such as economic indicators, policy responses, growth, inflation, global macros, future earnings potential of companies, the future project or executable order pipeline of firms and so on.

The bottom-up approach for mid and small cap stock selection would be used to vet opportunities based on earnings growth outlook, opportunity size for specific products and services, management track record (corporate governance structures), historical financial return ratios and importantly, valuations (PE, PB, etc).

The allocation across market caps is then done based on overall market valuation. The core portfolio of a flexicap strategy could have core portfolio of quality businesses based on their long-term potential. There must be care taken not to take concentrated bets by ensuring adequate stock capping.

The portfolio is rebalanced dynamically by adjusting holdings and modifying market cap allocations.

For retail investors, actively managed flexicap mutual funds are therefore well-suited as long-term core portfolio holdings. By relying on this disciplined, process-driven framework, fund managers use internal models, macroeconomic indicators, and valuation assessments to select stocks, manage market-cap exposure, and rebalance portfolios dynamically over time.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature