The flexicap fund category is a core equity holding for any long-term investor. The category has the appeal of a ‘go anywhere’ fund which can invest in any investible opportunity, any quantum and hold on to any length of time, basis investment judgement. While other category schemes have a threshold of market cap to maintain at all points of time, the flexi cap liberates the scheme to go any market cap and any quantum of the corpus. The condition to this that at all points of time, the scheme ought to be invested 65% and above into Indian equities. This unhindered approach married to the fund management expertise makes it appealing to investors. After all, investors are outsourcing their need of where to invest to the scheme to take most of the appropriate investment decisions.
This belief has translated to flexicap category being the largest equity investment category in the given scheme classification of mutual funds. The category has garnered approx. 2.49 lac crores of AUM which is in 1.25 crore folios. This is therefore the largest equity fund category in the active equity assets under management which was at 15.41 lac crores as of end Dec 2022. (Source: AMFI data as on end Dec-22). Clearly the simplicity of mandate of flexi cap category has attracted most of the investors.
The unhindered approach brings the onus on the fund management process to carve a path in this ‘go anywhere’ mandate. The road to financial success ought to be lane marked for safety and risk management. Fund management is always about prudent risk management as much it is about investment returns.
Sector basis or Market cap
For any flexi cap fund, the immediate investible universe is Nifty 500 index. There are two ways to approach this large set. The first and usual method is to consider a sectoral allocation inspired and guided by the sector break up of Nifty 500. This would be a facet of top-down investing where the macros and overall economic conditions are the guiding factors to investing. However, sectoral lens comes with its limitations mostly that winning sectors change every year. Hence, every year one must first check what were the winners & losers of a particular year and possibly exit the former and enter the latter. Also, this strategy also leads to an annual lens with annual churn of a major part of the portfolio. This may lead to a post facto reactive approach rather than having a proprietary process of equity investing.
The second method is the approach of looking at market cap valuations and making allocations from this point of view. Market cap segment, large cap, mid cap, and small cap usually exhibit longer trendlines unlike sectoral which usually show annual churn trends. The three market cap segments exhibit relative valuation to the Nifty 50 index and have extended periods of under or over valuations.
The usual method of sectoral or the other method of market cap relative valuations may give some prudent guidance to portfolio allocation however for a flexicap fund, the approach could be slightly granular. To this further, a flexicap fund gives the freedom to invest in any investible opportunity irrespective of its current size or which m-cap bracket it belongs to. The greater benefit is that the investible idea can be held across all timelines and as long there is merit in the investment. Unlike other market cap-oriented schemes which have set minimum investment in a particular market cap for the fund to be classified as a large or mid or small or large & mid cap fund, a flexicap fund has no market cap limits to adhere to. This allows the investment to be held in the fund if required to do so.
The unhindered approach to flexicap is therefore the attraction and the uniqueness of the category. The funds can hold the currently best investment ideas which have come through a filtration process. To do so, a bottom-up approach may be considered as a prudent method (amongst other options) to identify the growth potential of investment ideas for such a fund. This approach is also available for other category schemes too however, it is favourably suitable for flexicap fund portfolio.
Data shows that within market caps, the companies which move upstream from small, mid to large are indicative of their compounding growth over a period. Similarly, many stay consistently in their buckets, and some lose their way and go down the chart tables over a period. Staying within the cap buckets also, the top contributors and top detractors also change every year. These two trends make it imperative that identification of right investment idea is large determinant of investment experience. We believe having a bottom-up approach help in dentification and a flexi cap structure helps in staying invested purely on merit of the growth curve possible.
At Mirae Asset, we believe having a philosophy of looking at all businesses through a lens of valuations, opportunity, and management quality help us in putting forth a suitable investment philosophy to manage equity assets. We have used these guiding principles for the last 15 years through all our existing equity schemes which have been steadfast investment experience for investors. We would like to apply the same principles now to an unfettered mandate of flexi cap category which is an investors’ choice and a fund manager’s mettle proving category. With this NFO, we would like to put forth the start of a compelling investment option for our investors and distribution partners.
The author is Fund Manager, Mirae Asset Investment Managers