Flexi-cap funds may be turning into proxies of large-cap plans

Mumbai: Flexi-cap schemes are among the few equity mutual fund products that give fund managers the leeway to decide on where to invest in the stocks universe. But investment managers are taking no chances in stock allocations and loading up on blue chips in these schemes as exposure to smaller companies could lead to sharp swings in returns.

Analysts said flexi-cap schemes are taking the place of large-cap funds, which have largely been underperformers in recent years.

Data from ETIG show that the average allocation of flexi-cap schemes to large-caps is 65%, mid-caps is 17% and small-caps is 9.9% in June 2022.

Flexi-caps, the second largest category in the equity mutual fund space, handle assets of ₹2.11 lakh crore across 31 schemes.

Flexi-cap Funds may be Turning into Proxies of Large-cap Plans

For instance, Kotak Flexicap – the largest fund in the category with assets of ₹33,341 crore, has an allocation of 69% to large-cap companies.

“Since the inception of the fund, we have been managing it with an allocation pattern of 65-75% in large-caps and the rest in mid-caps and small-caps,” said Harsha Upadhyaya, chief investment officer-equity at Kotak Mutual Fund. “We try to go towards the extreme end of this allocation range based on relative valuations of the categories and market conditions.” Upadhyaya said the allocation range helps manage portfolio risk and expected returns better.

Analysts said there is comfort in large-caps due to better liquidity and stability in uncertain market conditions. “Large-cap companies are well-established companies that can offer better risk-adjusted returns and give stability to a portfolio,” said Kaustubh Belapurkar, director-fund research at Morningstar India. “A high allocation to small-cap and mid-cap stocks could make the fund more volatile with large drawdowns in the short term which may not be suitable for many investors looking to take diversified equity exposure and hence funds prefer to have a higher allocation to large-caps.”

Fund managers believe valuations are in favour of large caps. The Nifty 50 trades at a price-to-earnings (PE) ratio of 20.18 times, while the Nifty Midcap 150 is at a PE of 24.37 times, and the Nifty Small Cap 250 is at 20.79.

“Flexicaps have positioned themselves as better alternatives for large-caps in the last few years as the latter underperformed the benchmark indices,” said Vidya Bala, co-founder of Prime Investor. Bala said their ability to deliver superior returns with limited downsides has made them popular with investors.

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