Sebi-mandated schemes reduce risks with their flexibility to allocate in large-cap, mid-cap and small-cap stocks
In November 2020, the Securities and Exchange Board of India (Sebi) approved the launch of flexicap category of mutual funds, where at least 65 per cent of the corpus will be invested in equities. The name of the funds is derived from their flexibility to allocate across large-cap, mid-cap and small-cap stocks.
The market regulator had earlier introduced guidelines for asset allocation for multi-cap funds, mandating a minimum of 25 per cent of the corpus each in the three category of stocks. This was done to make the multi-cap funds true to their label and to circumvent the bias of some multi-cap funds that had a large-cap tilt. Following the flexicap announcement, most of the multi-cap funds that had large-cap-biased portfolio were reclassified as a flexicap funds.
Flexicap funds give the investor the opportunity to diversify one’s investment portfolio across companies of different market capitalisation, mitigating risk and lowering volatility through its flexibility to allocate the money dynamically across the spectrum.
Investing in a flexicap fund is relatively less risky as against a pure mid-cap or small-cap fund. This is because the fund manager in a flexicap fund has the leeway to capture the best available investing opportunity across the market at a particular point in time. Hence, for those investing with a long-term view, flexicaps can be good compounders because of their diversified portfolios, balanced risks and return aspects.
It’s the Time to Invest
While the markets have been on a steady rise, there is room for enhanced volatility, given the uncertainties regarding the stand of various central banks on stimulus packages, vaccination drive in different countries and domestic and global growth. Recovery in economic activities with limited lockdowns, vaccination successes, and sustained support from the government and the Reserve Bank to spur growth spell positives for the market in India. In such a backdrop, it is best to stay invested in a product which can spread out across market capitalisations.
The rationale here is that in case of a negative development, the presence of large-caps would limit the downside and provide liquidity to the portfolio and, if the positive aspects were to gather pace, then mid-caps and small-caps would be best-placed to capture potential upside from expected economic recovery.
Category Offering
Although flexicap is an established category, some fund houses had chosen to continue with their multi-cap offerings, not making them flexicap. ICICI Prudential Mutual Fund, for example, has recently launched its flexicap fund. The New Fund Offer (NFO) opened on June 28 and will close on July 12.
The investment will be a mix of top-down and bottom-up approach, identifying opportunities from the investment universe of S&P BSE 500. The scheme will be its in-house market cap allocation model which the fund manager will be relying on to make the market cap allocation and re-balancing decisions. This will ensure flexibility, albeit with control.
Some of the parameters used to create this model are market cap weight as a percentage of total market cap, valuation and relative strength index differential. Apart from this, it has an overlay of macro factors such as current account deficit or surplus, fiscal deficit, GDP growth and credit growth, inflation, tax revenues, capacity utilisation and corporate profitability.
During the phase of portfolio creation, the deployment will be in a staggered manner, basis the internal asset allocation model. For this purpose, other valuation models will also be relied upon. The fund will be opportunistic and dynamic in terms of market cap allocation with the large-cap allocation ranging anywhere at 50-100 per cent and mid-cap and small-cap allocation at 0-50 per cent.
Flexicap is an interesting category to invest in, given the current market situation. The new offerings hold promise and should be considered with a holding period of at least three years.
The author is Managing Director, J2 Wealth & Investments
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.