Flexi Cap vs Focused Funds: Which Mutual Fund Type Suits You Best?

November 27, 2024 By: Shalini Bhardwaj

Equity mutual funds are popular among investors for their potential to generate long-term wealth. Two commonly discussed types in this category are Flexi Cap Funds and Focused Funds. While both offer avenues for capital growth, they differ significantly in strategy, portfolio composition, and risk factors. If you’re planning to invest, understanding these funds’ characteristics can help you decide which one is better for your financial goals.

Similarities Between Flexi Cap Funds and Focused Funds

Equity-Driven Investments

Both Flexi Cap Funds and Focused Funds are mandated to invest at least 65% of their assets in equities or equity-related instruments. This ensures that these funds remain equity-centric, catering to investors with higher risk tolerance.

Diverse Market Exposure

Both funds can pick stocks from across market segments—large-cap, mid-cap, and small-cap. This flexibility provides exposure to companies of varying sizes and industries. Whether it’s a tech giant or a promising small business, both fund types have the liberty to include them in their portfolios.

Common Benchmark Indices

The performance of both funds is often compared against benchmark indices such as the BSE 500 Total Return Index and the Nifty 500 Total Return Index. These indices cover a broad spectrum of stocks, offering a comprehensive picture of market trends.

Key Differences Between Flexi Cap Funds and Focused Funds

Portfolio Size

• Flexi Cap Funds: No restriction on the number of stocks in their portfolio. This allows fund managers to diversify widely, spreading risk across multiple sectors and companies.
• Focused Funds: Can hold a maximum of 30 stocks at any given time. The concentrated nature of these funds makes stock selection critical, as a few poorly performing stocks can significantly impact overall returns.

Volatility and Stability

• Flexi Cap Funds: With greater diversification, these funds are typically more stable and less volatile.
• Focused Funds: Their limited portfolio can lead to higher volatility, as the performance heavily depends on the chosen stocks.

Role of Fund Manager

In Focused Funds, the fund manager’s expertise plays a larger role due to the concentrated portfolio. A well-chosen set of stocks can deliver impressive results, but poor decisions may lead to higher losses. Flexi Cap Funds, with their diversified approach, are less dependent on individual stock performance, making them relatively safer.

Comparing Returns: Top 5 Funds Over 5 Years

When deciding between Flexi Cap and Focused Funds, past performance can provide useful insights. Below are the top-performing funds from each category based on their 5-year Compound Annual Growth Rate (CAGR).

Top 5 Focused Funds (5-Year CAGR):

1. ICICI Prudential Focused Equity Fund: 24.97%
2. HDFC Focused 30 Fund: 23.76%
3. Quant Focused Fund: 22.42%
4. 360 ONE Focused Equity Fund: 21.78%
5. Franklin India Focused Equity Fund: 20.57%

Top 5 Flexi Cap Funds (5-Year CAGR):

1. Quant Flexi Cap Fund: 31.37%
2. Parag Parikh Flexi Cap Fund: 25.35%
3. JM Flexicap Fund: 24.54%
4. HDFC Flexi Cap Fund: 23.17%
5. Franklin India Flexi Cap Fund: 22.56%

Better Returns Than Benchmarks

The benchmark indices for these funds, BSE 500 Total Return Index and Nifty 500 Total Return Index, have delivered 5-year average annual returns of 18.87% and 18.76%, respectively. All the top funds from both categories have outperformed these benchmarks, showcasing their ability to deliver superior returns.

Flexi Cap Funds: Why They Stand Out

Flexi Cap Funds have consistently delivered higher returns compared to Focused Funds over the past five years. Their ability to diversify widely reduces risk while offering exposure to various market opportunities. For investors seeking a stable yet growth-oriented option, Flexi Cap Funds are a compelling choice.

Focused Funds: A High-Risk, High-Reward Option

Focused Funds, on the other hand, are ideal for investors who prefer a concentrated approach and can tolerate higher risk. These funds rely heavily on the fund manager’s stock-picking skills. While they may be more volatile, they can also deliver strong returns in favorable market conditions.

Factors to Consider Before Investing

1. Risk Appetite:
   If you’re comfortable with higher risk for potentially higher rewards, Focused Funds might suit you. For more conservative investors, Flexi Cap Funds are better.
2. Portfolio Size:
   If your portfolio already has multiple funds, adding a Focused Fund can provide targeted growth. However, for a standalone investment, Flexi Cap Funds are more balanced.
3. Investment Horizon:
   Both funds are suitable for long-term investments, but the volatility in Focused Funds makes them more suited for those with a higher risk tolerance over time.
4. Fund Manager Expertise:
   Focused Funds require a skilled fund manager due to the concentrated portfolio. Before investing, check the manager’s track record and strategy.
5. Diversification Needs:
   If you value a diverse portfolio that spreads risk across sectors and companies, Flexi Cap Funds offer better options.

Tips for Selecting the Right Scheme

• Evaluate Past Performance: Analyze the fund’s performance over at least 5 years to understand its consistency.
• Check Expense Ratios: Lower expense ratios can improve net returns over time.
• Understand Investment Philosophy: Ensure the fund’s strategy aligns with your goals.
• Review Portfolio Composition: Study the stocks included in the portfolio to assess its alignment with market trends.
• Seek Professional Advice: Consult a financial advisor if unsure about which fund suits your needs.

By considering your financial goals, risk tolerance, and portfolio needs, you can decide whether Flexi Cap Funds or Focused Funds are the right choice for you. Both funds offer unique advantages, making them valuable components of an equity mutual fund portfolio.