Flexi-cap funds: Invest if you prefer managers to handle market cap mix

Poor sector and stock selection calls can, however, lead to underperformance

Flexi-cap funds saw the sharpest rise in assets under management (AUM) among equity-oriented schemes in 2025. Their AUM rose 26 per cent from ₹4.38 trillion as of December 31, 2024, to ₹5.52 trillion as of December 31, 2025, according to Association of Mutual Funds in India (Amfi) data. 

Professional management sought 

The year 2025 saw significant market volatility. While the large-cap segment gained and mid-caps remained stable, small-cap as well as sectoral and thematic funds saw sharp drawdowns. “Investors were drawn to flexi-caps’ adaptability in a volatile, range-bound market with valuation disparities across large, mid, and small caps,” says Jiral Mehta, senior manager – research, FundsIndia. 

Nitin Agrawal, chief executive officer, mutual funds, InCred Money, echoes this view. “Flexi-cap funds became attractive as investors sought professional managers who could navigate changing market conditions effectively,” he says. 

At the start of 2025, large-cap valuations looked more attractive than those of mid- and small-cap stocks. “Flexi-cap funds attracted strong inflows as they remained largely large-cap oriented at a time when large-cap valuations were reasonable versus long-term averages,” says Trideep Bhattacharya, president and chief investment officer – equities, Edelweiss Mutual Fund.

 

Adaptability is their forte

 

The category’s main strength is flexibility. “Flexi-caps grant fund managers the freedom to dynamically allocate across market caps, capturing opportunities while spreading risk,” says Mehta.

 

Different market-cap segments perform differently across cycles. “Flexi-cap funds can navigate these cycles more effectively by adjusting allocations—something static allocation funds cannot do,” says Agrawal. Their managers can also capitalise on mispricing across market caps.

 

Bhattacharya adds that this adaptability generally places flexi-cap funds lower on the risk spectrum than pure mid- or small-cap funds.

 

Flexi-cap funds can also make portfolios easier to manage. “For investors who find managing multiple funds complex, a well-managed flexi-cap fund can serve as a comprehensive equity solution, reducing the need for constant rebalancing between different market-cap categories,” says Agrawal.

 

Some flexi-cap fund mandates allow overseas investments. “Such geographic diversification can shore up performance in years when Indian equities struggle,” says Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors.

 

They also offer tax efficiency. “Whenever money moves within the portfolio from one sub-asset class to another, there is no tax impact for the investor,” says Dhawan.

 

Active management risk 

Flexi-cap fund performance depends heavily on the fund manager’s decisions. “Changes in management or poor allocation calls can hurt returns. Unlike index funds, there’s substantial active management risk,” says Agrawal.

 

If one segment rallies sharply and the fund lacks exposure to it, underperformance can follow. Many flexi-cap funds remain large-cap dominant. “During strong risk-on phases, they may underperform mid- and small-cap funds, which tend to benefit more from aggressive market rallies,” says Bhattacharya. Investors seeking higher mid- and small-cap exposure to boost long-term returns may find a large-cap tilt unattractive.

 

At the other extreme, aggressive allocation enhances risk. “Heavy mid- or small-cap tilt heightens volatility and drawdown risks versus pure large-caps during corrections,” says Mehta.

 

Dhawan adds that these funds may also lag due to stock-selection errors or inappropriate weightings of stocks within the portfolio.

 

Style drift poses another concern. “A fund that historically favoured growth stocks might shift to value orientation, or vice versa, potentially not aligning with investor expectations,” says Agrawal.

 

Who should invest, who should avoid 

Flexi-cap funds suit first-time equity investors seeking broad market exposure through a single fund. They can also work for investors with limited time or expertise to manage and rebalance multiple schemes.

 

“Flexi-cap funds best fit investors with moderate to high risk appetite and a five-plus-year horizon seeking adaptive diversification,” says Mehta.

 

More experienced investors may prefer separate allocations. “Sophisticated investors with a clear view on asset allocation and risk appetite may prefer separate allocations to large-, mid-, and small-cap funds,” says Bhattacharya.

 

Dhawan says such investors often want control over market-cap weights. “There could be times when they could be wanting 50, 60 per cent or 70 per cent mid- and small-cap exposure. That flexibility would not be available in the case of flexi-cap funds,” he says.

 

Life stage also matters. “Conservative investors approaching retirement might prefer large-cap stability, while young professionals might want to allocate more to mid and small-caps for growth,” says Agrawal. Such investors must also be comfortable with the tax incidence that may arise when they hold multiple funds.

 

What to check before investing 

Since mandates are flexible, consistency of process becomes critical.

 

Examine the fund manager’s track record across market cycles. “Investors should evaluate the robustness of the investment process and the fund manager’s track record in managing allocations across cycles,” says Bhattacharya.

 

Investors should also study portfolio concentration, sector exposure and historical market-cap allocations to see if they align with their risk tolerance. Expense ratios and portfolio turnover provide insight into cost efficiency and trading discipline.

 

Style consistency matters too. “It’s important to understand whether the fund manager follows a growth, value or blend approach and whether that matches the investor’s own preferences,” says Dhawan.

 

Investment horizon and allocation 

Equity investing demands time, and flexi-cap funds are no exception. Short holding periods increase timing risk, especially in volatile markets. “Flexi-cap funds are best suited for an investment horizon of at least five to seven years,” says Dhawan.

 

These funds often serve as the core of an equity portfolio. Depending on risk appetite, they may account for 30–40 per cent of overall equity exposure.

 

What to do after a weak year 

Flexi-cap funds delivered about 6.7 per cent returns over the past year. That alone should not drive portfolio decisions.

 

“One-year performance is insufficient to assess flexi-cap funds. Investors should look at performance across a full market cycle,” says Bhattacharya.

 

Rather than reacting to short-term underperformance, investors should review whether the fund’s strategy remains intact.