When it comes to the popularity of equity funds, the two categories which generally attract the most interest are flexi cap funds and large cap funds. The parameter of popularity is of course not the best one as periodically, different categories tend to hog the limelight based on the near-term returns they generate. So, for example, small and midcap funds have been the rockstars of the last few years.
But generally, the two categories of flexi cap funds and large cap funds are the evergreen ones. As per the last AMFI monthly data (May-2024), there were 39 schemes with a total AUM of ₹3.73 lakh crore in Flexicap category and 31 schemes with an AUM of ₹3.23 lakh crore in large cap funds (not passive ones).
Most investor portfolios tend to have schemes from both categories these days. But is it necessary? We will explore and try to answer a question in this article – and that is - Is flexi cap fund enough or you need to have a large cap fund as well in your mutual fund portfolio?
But given the similarities in how at times both are managed by the fund manager (more about similarities in a bit), is there really a case for having schemes from both categories in your portfolio? Or having funds from just one category is enough?
Before that, let’s see what the SEBI categorization rules have to say about these two categories and how they differ:
- Large cap funds are required to invest 80% minimum in large cap stocks (these are stocks of companies that are in the top-100 by market cap).
- Flexi cap funds, as their name suggests, have a lot more flexibility. The fund manager has the freedom to invest across stocks of businesses from different market caps without any restriction/requirement on maximum/minimum allocation. So, at least theoretically, a flexicap fund manager has full freedom to invest any proportion as he likes (or as per his strategy) in stocks from large-, mid- and smallcap segments.
What this means is that if one is interested in investing purely in shares of large companies, then the large cap category is best suited as it gives equity exposure to some of the largest Indian businesses. On the other hand, if one wants a mix of all the segments (large/ mid/ small), then flexicap is a better choice.
If this is so, then what is the problem?
Why can’t investors have both funds in their portfolio?
That is entirely feasible and nothing wrong in investing in both.
But there is a small thing that most common investors don’t know about flexi cap funds. This requires one to dig deeper and analyse individual fund portfolios. So, what is this small thing?
Remember that the large cap funds are required ‘mandatorily’ to invest at least 80% in large cap stocks. There are no such restrictions like this in flexi cap funds though. But the problem is that a vast majority of the 39 schemes in the flexicap category tend to have a very high allocation to large cap stocks. From 60% to almost 75% in a few schemes.
Now you may say that it might be a fund manager’s strategy to invest more in large caps based on their then ‘current’ view about the market and conditions. While this might be true occasionally and to some extent, it doesn’t provide full justification.
A more probable reason (and don’t expect fund managers to agree to this as they have a job to do) is that given how big many flexi cap funds have become, at times, there are not enough ways to deploy large amounts of money that they get in inflows every month. Large cap stocks have enough liquidity and scale to absorb such money.
But given the nature of small and mid cap stocks and their much limited scale/ liquidity, it often becomes very difficult to buy large chunks of shares in these smaller companies without disrupting their prices. Hence, flexi cap funds tend to have a bias towards large caps.
To be fair, the bias towards large cap stocks, while there is in most flexi cap funds, there are still few who don’t follow the herd. Many such flexi cap funds have a decent allocation to mid caps and small caps as well.
So, what should you do?
Let me list down a few pointers to help you decide:
- If you have a conservative risk profile and just want a small equity allocation, then keep things simple and do it via pure large cap funds. In fact, you can just pick passive large cap funds and can ignore active ones fully. And you just need one fund in a large cap. Don’t invest in multiple schemes from this category.
- It is important to understand that different flexicap fund managers follow different strategies and styles. So, one can have up to 2 flexi cap funds because both offer something unique. But generally, for smaller portfolios, just one from the flexicap fund category would be enough.
- If you have a Balanced risk profile, then you can invest in both. While there will be certain overlaps, that should be fine. Having funds from both will allow you to have a predominantly large cap-oriented resultant portfolio with a comparatively smaller allocation to mid-small cap stocks via flexi cap fund.
- And what if you are an aggressive investor? In that case, one can just go for flexi cap funds and not have any pure largecap plays. Though still having funds from both categories isn’t exactly wrong.
Dev Ashish is a Sebi-registered investment adviser and the founder of Stable Investor
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First Published:
24 Jun 2024, 09:19 AM IST
Business NewsMutual FundsMutual Fund Portfolio: Is a flexi cap fund sufficient without a large cap fund?
