It’s raining flexicap funds; here’s why

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It’s raining flexicap funds! Two new fund offers (NFOs) in the flexicap category — Mahindra Manulife Flexi Cap Yojana, Nippon India Flexi Cap Fund — are ongoing while DSP Investment Managers has unveiled open fund offer Of DSP Flexi Cap Fund. ICICI Prudential garnered a whopping Rs 10,000 crore in its flexicap fund NFO concluded on July 12. It was the highest-ever fund collection in an NFO by an open-ended equity mutual fund.

The flexicap category is the second-largest equity mutual fund category after largecap funds. It had Rs 1.76 lakh crore assets under management as on June 2021 compared to Rs 1.94 lakh crore in the largecap category.

What are flexicap funds?

Flexicap funds give fund managers flexibility to navigate across the market-capitalisation. Unlike other categories (largecap, midcap, large-midcap, smallcap and multicap funds) where market regulator Sebi has fixed threshold for exposure in largecap, midcap and smallcap stocks, flexicap funds can increase or decrease exposure in these stocks as per the market condition depending on their own fund methodology.  The category was launched in November 2020 after Sebi modified the characteristics of multicap schemes.

New category launch

To be sure, multicap funds were designed to take exposure across market capitalisation. However, with a prolonged underperformance of smallcap and midcap stocks between 2018 and 2020, a lot of multicap funds turned largecap-heavy, thus defeating the purpose of being a multicap fund. In September 2020, the Sebi thus mandated fund houses to invest at least 25% of the corpus each in large, mid, and smallcap stocks in multicap schemes. Subsequently, it launched a new category to give fund managers some flexibility to move across stocks as per their acumen.

Why a flurry of flexicaps now?

After the launch of a flexicap category, fund houses had a choice to rename their existing multicap funds into a flexicap fund to avoid sticking to 25%-market cap mandate. Some of the fund houses such as Kotak Mahindra AMC and PPFAS Mutual Fund renamed their multicap funds (Kotak Standard Multicap Fund, Parag Parikh Long Term Value Fund) into flexicap funds (Kotak Flexicap Fund, Parag Parikh Flexi Cap Fund).

“AMCs which did not rename their existing multicap funds are launching flexicap funds to have a complete bouquet of products across categories. Flexicap NFOs are helping them garner fresh AUM,” says Vidya Bala, co-founder, PrimeInvestor.in.

She advises investors to avoid investing in flexicap NFOs.

“There are sufficient flexicap funds available in the market with a good track record. Compare among them based on the consistency of returns across market cycles and calendar years and between bearish and bullish markets. Focus on expense ratios too. More nuanced investors who understand portfolios may look into stocks and sectors. For example, metals and sugars are in flavour now. Check out if the scheme is invested in those or not,” says Bala.