What’s driving the shift towards flexi-cap funds—and why now?

A shift in market trends helped flexi-cap funds attract nearly 29% of equity inflows between May and November

- Ayneet Kaur [e-mail]

Investor money is making a clear pivot towards flexi-cap funds. Between May and November, these schemes accounted for nearly 29% of net inflows into diversified equity mutual funds, emerging as the category of choice for investors seeking flexibility amid shifting market conditions.

The timing is no coincidence. After a prolonged rally in midand small-cap stocks, valuation comfort is returning to large-caps. As flexi-cap funds naturally tilt towards these segments, their recent outperformance has reinforced a growing belief: that they offer diversification without forcing exposure to overheated parts of the market.

But flexi-caps aren’t the only funds promising diversification. Multi-cap funds also invest across large-, midand small-cap stocks—albeit with fixed allocation rules. That raises a key question: are flexi-cap funds truly the smarter choice, or do multi-cap funds offer a more balanced diversification strategy over the long run?

Why are flexi-cap funds drawing money now?

Renewed interest in flexi-cap funds coincides with a clear shift in market leadership. In the past year, large-caps begun regaining strength as valuations in midand small-cap stocks have stretched. "Going by key market-cap indices, large caps are now trading at reasonable levels,” said Sriram BKR, senior investment strategist at Geojit Investments.

Large-caps, he said, trade at a 6-7% discount to their 10-year average valuations. In contrast, small-caps trade at a 12% premium, mid-caps at 20.7%, and micro-caps at a steep 38%. After years of outsized returns from smaller stocks, large-caps now appear relatively undervalued.