Opt for flexi-cap, multi-cap funds amid market volatility: Experts

Indian equity markets have seen intense volatility the past few days as foreign portfolio investors continued to pull out money from domestic markets. Given the current scenario, executives in the mutual fund (MF) industry say this is the right time to re-enter equity markets by investing in multi-cap or flexi-cap funds.

Globally, rising inflationary concerns and geopolitical tensions have led to risk aversion among investors, leading to a sharp fall in equity markets the world over.

For Indian markets, rising crude oil prices and continuous selling by foreign institutional investors are leading to rising volatility.

In the past three months, the S&P BSE Sensex is down 5 per cent, while the S&P BSE Midcap and the S&P BSE Smallcap indices have also shed 3.62 per cent and 5.16 per cent, respectively.

“While we remain positive on mid-cap and small-cap funds over the medium to long term, investors need to be cautious in these funds as volatility is likely to be higher in this segment. Multi-cap or flexi-cap funds are better placed for most investors in the current environment,” says ICICI Direct Research in its report.

Given the current situation in Indian equity markets, flexi-cap and multi-cap funds can be helpful in the portfolio as fund managers can move money across market capitalisations (m-caps), depending on their outlook, say industry participants.

Multi-cap schemes are mandated to invest at least 25 per cent of the corpus in large-, mid-, and small-cap stocks apiece. Market participants say that diversification across m-caps will ensure the portfolio is not overtly concentrated towards a particular m-cap.

Flexi-cap and multi-cap funds have continued to be in demand the past few months as they give investors all categories of stocks in one fund. In the past six months, multi-cap and flexi-cap funds have seen net inflows of Rs 22,433 crore and Rs 15,140 crore, respectively.

Data from Value Research shows that on an average, flexi-cap and multi-cap funds have given returns of 21.23 per cent and 28.5 per cent, respectively, in the past year. Large-cap funds have given average returns of 20.17 per cent in the past year.

Sorbh Gupta, fund manager-equity at Quantum MF, says, “Geopolitical challenges, inflation, rising interest rates, recurrence of Covid cases in some parts of the world, and premium valuations have made equity look somewhat directionless in the near term. However, these are times for investors to stay the course in their investment journey to achieve their financial goals. Equity investors should stagger their allocation to equity over a period and move asset allocation to the optimum level as defined by their asset allocation plan.”