Flexi-cap Funds’ Large-cap Bias: A Threat to Investor Returns?
Flexi-cap funds have long been a popular choice among investors due to their flexibility to invest across large-, mid-, and small-cap stocks. However, a recent report by Axis Mutual Fund suggests that this flexibility has resulted in a persistent bias towards large-cap stocks, limiting participation in broader market rallies.
Flexi-cap funds’ large-cap bias: A closer look
According to the report, multi-cap funds, which are mandated to invest at least 25% each in large-cap, mid-cap, and small-cap stocks, have maintained a more balanced portfolio structure. This has helped them participate more consistently in the broader market rally over the past few years.
The report highlights that the key attraction of flexi-cap funds has always been their flexibility to move across market capitalisations in response to investment opportunities. However, most portfolios have continued to maintain a dominant allocation towards large-cap companies.
Why large-cap stocks remain a preference
The report mentions that this preference is understandable because large-cap stocks offer better liquidity, greater stability, and relatively lower risk during uncertain market conditions. Category allocation data shows that flexi-cap funds have consistently maintained around 60% or more exposure to large-cap stocks over the past five years.
Multi-cap funds’ balanced approach
- Multi-cap funds follow a structurally different approach, with regulations requiring them to remain invested across all three market-cap segments.
- Large-cap exposure in the category gradually declined from 42% in March 2022 to 40% in March 2026, while allocations to mid- and small-cap stocks remained significantly higher than those of flexi-cap funds throughout the period.
- By staying invested across large, mid and small-cap segments, multi-cap funds have been better positioned to benefit from a broader market upcycle.
Key Takeaways
- Flexi-cap funds have consistently maintained around 60% or more exposure to large-cap stocks over the past five years.
- Multi-cap funds have delivered better returns compared to flexi-cap funds, with the Nifty 500 Multicap 50:25:25 TRI generating 15.3% annualised returns over three years and 14.2% over five years.
- Investor inflows continue to remain skewed towards flexi-cap funds, which still account for a much larger share of assets under management.
FAQs
What is the main difference between flexi-cap and multi-cap funds?
Flexi-cap funds have the flexibility to invest across large-, mid-, and small-cap stocks, while multi-cap funds are mandated to invest at least 25% each in large-cap, mid-cap, and small-cap stocks.
Why do investors prefer flexi-cap funds?
Investors tend to stay with categories they are comfortable with, even when market conditions begin to favour alternative approaches. Flexi-cap funds have long been a popular choice among investors due to their flexibility to invest across large-, mid-, and small-cap stocks.
What are the benefits of multi-cap funds?
Multi-cap funds have delivered better returns compared to flexi-cap funds, with the Nifty 500 Multicap 50:25:25 TRI generating 15.3% annualised returns over three years and 14.2% over five years. By staying invested across large, mid and small-cap segments, multi-cap funds have been better positioned to benefit from a broader market upcycle.
Conclusion
The report by Axis Mutual Fund highlights the need for investors to consider a more balanced approach to investing, particularly in a market where opportunities emerge across large, mid and small-cap companies. While flexi-cap funds are likely to remain relevant, particularly during periods when market leadership is concentrated, multi-cap funds could become increasingly important for long-term investors seeking sustained exposure across the broader equity market.
Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.
