Flexicap mutual funds have long been a favourite among Indian investors seeking diversification across market capitalisations without restrictions. However, recent performance data suggests that not all flexicap funds are created equal, with only a handful delivering truly impressive returns for systematic investment plan (SIP) investors over the past five years.
Understanding Flexicap Funds
Flexicap funds are equity mutual fund schemes that have the flexibility to invest across large-cap, mid-cap, and small-cap stocks without any prescribed allocation limits. This freedom allows fund managers to shift investments based on market conditions and opportunities, theoretically positioning these funds to capture growth across the entire market spectrum.
The category became official in November 2020 when SEBI reclassified multi-cap funds, creating a distinct flexicap category. Since then, these funds have attracted significant investor interest due to their adaptive nature and potential for higher returns compared to more restricted categories.
The Reality Check on Performance
The finding that only eight flexicap funds achieved 15% or higher annualised SIP returns over five years serves as an important reality check for investors. This represents a small fraction of the total number of flexicap schemes available in the market, which currently stands at over 30 funds.
For context, a 15% annualised return is considered a strong benchmark in equity investing, significantly outpacing inflation and traditional savings instruments. It also represents performance that beats the broader market indices over most five-year periods.
Why Most Funds Underperformed
Several factors contribute to the underperformance of the majority of flexicap funds:
- Market volatility during the assessment period, including the COVID-19 crash and subsequent recovery
- Fund manager decisions on asset allocation that may not have capitalised on emerging opportunities
- Higher expense ratios eating into returns, particularly in regular plans
- Inconsistent investment strategies or frequent changes in fund management teams
- Overexposure to underperforming sectors or market segments during critical periods
What This Means for SIP Investors
SIP investors specifically benefit from rupee cost averaging, where regular investments at different market levels reduce the overall cost per unit. However, even this advantage requires the underlying fund to perform reasonably well over time.
The five-year horizon is particularly relevant for SIP investors as it represents a medium-term investment period—long enough to ride out short-term volatility but not so long that it becomes irrelevant for goal-based planning.
Investors should note that past performance, while informative, does not guarantee future returns. The funds that performed well over the past five years operated in a specific market environment that may not repeat itself.
Key Considerations for Choosing Flexicap Funds
When selecting flexicap funds for SIP investments, investors should evaluate several critical parameters:
- Consistency of performance across different market cycles, not just peak returns
- Fund manager track record and tenure with the scheme
- Expense ratio, with a preference for lower-cost direct plans
- Portfolio concentration and diversification across sectors and market caps
- Investment philosophy and whether it aligns with your risk appetite
- Fund size, as very large funds may face deployment challenges while very small ones may lack stability
The Broader Investment Landscape
The flexicap category exists alongside other equity fund categories like large-cap, mid-cap, small-cap, and multi-cap funds. Each serves different investor needs and risk profiles. The flexibility that defines flexicap funds can be both an advantage and a disadvantage—skilled fund managers can use it to generate alpha, while others may struggle with the lack of structure.
Investors should remember that a diversified portfolio might include funds from multiple categories rather than concentrating entirely in flexicap schemes, regardless of their appeal.
Moving Forward
For investors currently holding flexicap funds that haven't delivered strong returns, this analysis provides an opportunity to review and potentially rebalance their portfolios. However, any decision to switch funds should consider exit loads, tax implications, and whether the underperformance is temporary or structural.
New investors should use this data not as a reason to avoid flexicap funds entirely, but as a reminder to conduct thorough due diligence before investing. Consulting with a financial advisor can help match fund selection with individual financial goals and risk tolerance.
This article is for informational purposes only and should not be considered as investment advice. Past performance does not guarantee future results. Investors should conduct their own research or consult with a certified financial advisor before making investment decisions. Mutual fund investments are subject to market risks.
