What is the importance of a Flexi Cap Fund in a healthy investment portfolio?
On 20 November 2020, the Securities and Exchange Board of India (SEBI) introduced a new mutual fund category—the flexi-cap fund. Since then, this mutual fund category has seen a lot of positive action. Today, flexi-cap funds such as the Parag Parikh Flexi Cap Fund have risen in popularity and are now considered to be a vital investment instrument by seasoned investors. Here is a closer look at why this mutual fund category is so important for a healthy investment portfolio.
What is a flexi-cap fund?
Flexi-cap funds are open-ended mutual fund schemes that are dynamic in nature. They have to invest a minimum of 65% of their corpus in equity and equity-related securities of small-cap, mid-cap, and large-cap stocks. Thus, mutual fund managers can invest in a wide variety of companies with differing market capitalisations across industry sectors and segments. Fund managers, therefore, have the power to maximise or limit the exposure to a particular market segment on the basis of how they think that segment will perform.
Why are flexi-cap funds important in a healthy investment portfolio?
- Offers crucial diversification: Not only do flexi-cap mutual funds invest across industry sectors, but they also invest across market cap segments. So, your investment portfolio will automatically have an increased diversity. The stronger the diversification of an investment portfolio, the better it is equipped to withstand market fluctuations. Large-cap investments are market leaders that are usually not subject to great volatility. Mid-cap and small-cap investments have great potential for expansion and growth. So, investors gain from diversification, increased potential for growth, and market-linked returns.
- Offers stability to a portfolio: Fund houses like the Parag Parikh Mutual Fund house offering flexi-cap mutual funds, invest in well-established and stable large-cap companies. So, they profit from stable growth in earnings. These large-cap assets also act as a cushion during times of market downswings.
- Dynamic asset allocation: These funds are actively managed by experienced and skilled fund managers who adjust the fund’s investment in assets based on market performance. The fund manager has the advantage of investing across market and industry segments, themes, sectors, and so on. They have access to research and a range of tools to help them make informed decisions that help generate better returns despite market conditions. If and when the market situation requires, the fund manager can reduce the fund exposure to riskier market segments to zero, while increasing the exposure to stable segments like large-cap assets. This, dynamic asset allocation helps in stabilising the fund portfolio during bear phases. During bull market phases, the fund manager may choose to increase exposure to small and mid-cap assets as a way to increase returns. So, investors get the advantage of a great mix of value and growth assets along with the potential to manage market downswings.
- Affordable: With a single mutual fund investment, you get exposure to more than one industry sector and market cap segment. With a single investment, you get a professionally managed mutual fund comprised of some of the best stocks in the market. Moreover, these mutual funds are highly affordable. If you choose to invest in these mutual funds via a systematic investment plan (SIP), then it is even more affordable. You will be investing a small amount at regular intervals at a price and pace that is suitable for you. This way you will get the benefits of disciplined investing and rupee cost averaging along with all the other benefits offered by flexi-cap funds. For example, the minimum SIP investment for the Parag Parikh Flexi Cap Fund scheme is a mere Rs 1000. The Parag Parikh Mutual Fund house has set the minimum lumpsum investment at Rs 1000 as well.
- Helps beat inflation: Since flexi-cap funds invest a majority of their investment corpus in equities, they have a strong capacity to beat inflation in the long run.
Should you invest in a flexi-cap fund?
Today, the flexi-cap fund by the Parag Parikh Mutual Fund house has a fund size of over 27 crores with a 5-star rating. But does that mean that a flexi-cap mutual fund is the right one for you? A flexi-cap fund such as the Parag Parikh Flexi Cap Fund may be right for you if:
- You have a long-term investment horizon. As flexi-cap funds invest majorly in equities, to get the most out of your investment, you need to remain invested for at least five to seven years.
- You want to capitalise on the growth opportunities offered by small and mid-cap stocks, but want to reduce the risks associated with these stocks.
- You are not afraid of exposure to volatility in the short term.
Flexi-cap funds are a fantastic investment that lends both stability and growth to a portfolio. Hence, investors should choose a flexi-cap fund to act as the core of their investment portfolio.