Let The Fund Do The Rebalancing

The last 12 to 18 months have been a challenging time for Indian equity investors. While headline indices have delivered positive returns, broader markets have either been flat or in the red with volatility being a constant feature. Several factors have contributed to this muted performance. Elevated valuations relative to historical averages and global peers, uncertainty on the US trade policy front, slowing corporate earnings momentum, a weakening rupee and sustained selling by foreign investors have all weighed on markets.

If we dive deeper, we see that market performance has varied for different market segments. Small cap stocks delivered stellar returns in calendar year 2024, only to see losses in 2025 as excess valuations in the segment began to unwind. Mid cap stocks saw a strong up-move in 2024 followed by slower gains in 2025. In contrast, large cap stocks fared moderately in 2024 but yielded solid positive returns in 2025, supported by relatively reasonable valuations.

This alternating pattern of outperformance and underperformance across large, mid and small cap stocks is not new. Historically too leadership has rotated between market segments. Thus, identifying which segment of the market is positioned to perform well and which warrants a reduced allocation, however, remains a key challenge for investors.

This is where flexi cap mutual funds come in. By regulation, flexi cap funds can invest in small, mid and large cap segments with no minimum or maximum limits restricting their allocations. This structure gives them true flexibility to dynamically increase allocation to segments set to outperform and reduce allocations to segments set to underperform based on an analysis of market valuations, business cycles, domestic and global macros, market sentiments and other positive or negative market-moving events.

For instance, in 2024, was a year where India witnessed strong economic momentum, higher allocation to mid and small cap segments could have meaningfully enhanced returns given that these segments tend to outperform during market upcycles characterized by strong growth potential, elevated risk taking and upbeat investor sentiment. Conversely, in 2025, a year marked by heightened global and domestic uncertainty, higher allocation to large caps could have helped limit downside risk as large companies usually have stronger balance sheets, lower earnings volatility and better risk management abilities making them relatively more resilient during periods of market stress. They are also less volatile compared to mid and small cap peers, providing the portfolio much needed stability during sharp market movements. Thus, flexi cap funds with their ability to dynamically allocate across market capitalizations could have responded accordingly, aiding returns and also limiting downside risk.

Since flexi cap funds invest across market capitalizations, they are never concentrated in only one market segment. This diversification is helpful as weakness in any one segment gets compensated by strength in the other segment, reducing the likelihood of outsized portfolio drawdowns.

Equity markets in 2026 are likely to be influenced by geopolitical uncertainty, strong domestic macros, central bank policies, implementation of the India-US trade deal, corporate earnings delivery, foreign investor flows, among other factors. As such, large caps are again expected to be the anchors of performance and provide stability. Meanwhile, selective opportunities could emerge in the mid and small cap space, supported by valuation corrections seen over the past year. In such an environment, Flexi cap funds can help investors navigate market volatility more effectively.

Disclaimer: Harsh Chaturvedi is the Director at Opulence Invest Services Pvt Ltd. The views expressed are his own. This article is not part of Outlook Money’s editorial content, and Outlook Money does not endorse any views, products, or services mentioned.

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