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If you go by the response to flexi cap NFOs in the recent months, it appears to have emerged as a distinct investing class. Last month, the ICICI Pru Flexi Cap Fund collected Rs.10,000 crore in its NFO. In August, the Nippon Flexi Cap fund also closed with collections of Rs.3,000 crore. Why this euphoria?
If you have any doubts about flexi cap as an asset class just look at the AUM. Currently, the AUM of flexi cap funds is just below the large cap AUM and with the deluge of NFOs, it is likely to soon get the better of the large cap funds. In the past, the multi-cap funds played the role of combining large caps and smaller caps. However, with SEBI tightening the norms for multi-caps, most of these funds have logically gravitated towards christening themselves as flexi caps. If the proof of the pudding lies in the eating, then there is enough proof for investors to plump for these flexi-caps. For example, in the last 5 years, these flexi-caps have given an average return in the range of 14-15% annualized, and that is extremely attractive. Most of the flexi-caps have given a worst-case yield of 10-11% over the last 5 years, which means that the risk of volatility is also quite limited. Also, since these flexi cap funds have the flexibility to combine the large caps, mid-caps and small-caps in a ratio at their discretion, they promise the best alpha for long term investors.
For a long time, the Indian markets were a play on alpha and that alpha came from mid and small caps stocks which were not extensively tracked by the analyst community. Also, the mid-cap stocks consisted of focused players and they did not have the typical large cap worries like over-investment or too much debt. Most of the mid and small caps tended to be focused players by default since they did not have either the capital or the management band-width to handle a diversified business. The flexi caps combined large caps, mid-caps and small caps with greater flexibility and discretion with promise of higher effective yields in the long run. That is what has attracted retail level investors to these flexi-cap funds.
If you were to look at the traditional risk scale, flexi caps would be riskier than large caps but safer than mid-cap and small cap funds. A better way to answer this question is with real data. If you look at the Sharpe and Treynor ratios of flexi cap funds, they are decisively in the positive. That means they have been adding value over the long term on risk-adjusted basis. Also, a beta of 0.9 and covariance of 86% implies that there is still room for index-delinked returns on these flexi-cap funds. It is this promise, which is driving a deluge of retail funds into these flexi cap fund offerings!