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Weekly Musings – NFO Pick (Bajaj Finserv Flexi Cap Fund)

22 Jul 2023 , 08:07 PM

Flexi cap funds were a recent introduction in the mutual fund lexicon and were introduced as a finer classification of multi-cap funds. SEBI felt that the multi-cap fund was a very generic name.

HOW MULTI-CAP FUNDS DIFFER FROM FLEXI-CAP FUNDS?

While the name sounded like a formula based allocation to large caps, mid-caps, and small caps, in reality, the fund manager had absolute discretion in this allocation. To overcome this popular confusion in the minds of investors, SEBI decided to split these funds into multi-cap funds and flexi-cap funds. How do they differ? The difference is basically in the extent of leeway allowed to the fund manager in terms of allocation across large caps, mid-caps, and small caps.

Under the new dispensation, SEBI has stipulated that multi-cap funds must mandatorily maintain the minimum allocation of 25% each to large cap stocks, mid-cap stocks and small cap stocks. The leeway to the fund manager is only available for the balance 25%. However, in the case of flexi-cap funds, the fund manager has the total leeway to allocate across large caps, mid-caps, and small caps in the way they deem fit. This makes them flexible.

WHY HAS THERE BEEN A MAJOR SHIFT TO FLEXI-CAPS?

In the last few years, there has been a major shift in AUM towards flexi-caps. Fund managers often complain that for a flexi-cap fund with a large corpus forcing a 25% allocation to small caps and mid-caps is impractical since the supply may just not exist in the market, and even if there is supply it may come with a huge impact cost. That has led to a sharp surge in the AUM of flexi caps, something we shall look at in detail later. The bigger question is how are stocks classified as large caps, mid-caps, and small caps? It is based on a market cap ranking formula and here is how it works.

Firstly, all the stocks on the NSE and BSE are combined and ranked descending on market capitalization. In case, the stock is listed on both the exchanges, the market cap of the exchange with the higher market cap is taken into consideration. Once the ranking is completed of all stocks, the top 100 stocks by market are classified as large cap stocks. Stocks ranked from 101 to 250 are classified as mid-cap stocks. On the other hand, stocks ranked from 251 and below are ranked as small cap stocks. This list is reviewed on a half-yearly basis and appropriate changes are made to the list.

ADVANTAGES OF INVESTING IN FLEXI-CAP FUNDS

As we saw earlier, the flexi cap funds are like multi-cap funds but with greater leeway to the fund manager in terms of allocation. Unlike in multi-cap funds, the flexi-cap fund does not dictate how much the fund manager must allocate to large caps, mid-caps, and small caps. Here are some of the key advantages of investing in flexi-cap funds.

Flexi-cap funds offer the unique flexibility to move across market capitalization. The fund manager can distribute the corpus across large caps, mid-caps and small caps based on best judgement and can also make changes in a flexible manner. This allows the investors to reap the benefits of a wider spectrum of stocks and alpha hunting.
There is a wide and automatic diversification that is built into flexi-cap funds. These fund are automatically diversified across large companies and mid-sized companies. In India, some of the biggest wealth creators have been small caps and mid-caps evolving into large caps. Investors in flexi-cap get the best benefits of wealth creation at lower risk.
When you opt for a capitalization based approach to investing, the sectoral or thematic bias is automatically eliminated. Typically, the mid-cap and small cap stocks are bottom-up plays where the fund manager goes by the stock-specific story and is largely agnostic to the industry or theme that the stock belongs to. This reduces the sectoral bias.
By default, the flexi-cap funds adopt a bottom-up approach. That is because, while a top-down approach works in the case of large cap stocks, it is not too helpful in the case of mid-cap and small cap companies. This forces the fund managers to undertake in-depth research of the stocks before taking a view on the position.
Unlike the multi-cap fund, the fund manager is not constrained by basic minimum allocations. If the fund manager sees less potential in smaller stocks, they can allocate more to large caps. The converse can be true when there are too many attractive stocks going abegging in the mid-cap and small cap space. You get the best of both worlds.
Finally, flexi-caps offers an unhindered approach to investing and to stock market allocation. The fund manager can take a call on cycles and position the portfolio accordingly. The fund manager can take a call on large caps versus mid-caps versus small caps based on factors like attractiveness, liquidity etc.

ARRAY OF FLEXI CAP FUNDS AVAILABLE IN INDIA

There are several flexi cap funds that are available in India and the AUM of this segment has also built up substantially in the last few years. Most of the large fund houses already have a flexi-cap fund in their offering and many multi-cap funds also converted to flexi cap funds to make the best of the discretion offered to the fund managers. Here are some of the top flexi cap funds available in India based on 1 year returns, returns since inception and their AUM as of June 2023. Check out the table below which his indexed on 1 year returns.

Scheme Name	NAV Direct	Return 1 Year (%) Direct	Return Since Launch Direct	Daily AUM (Cr.)
JM Flexicap Fund	70.80	27.43	16.70	449.73
HDFC Flexi Cap Fund	1,387.46	27.07	15.73	37,478.83
Quant Flexi Cap Fund	74.39	25.47	18.98	1,693.11
Parag Parikh Flexi Cap Fund	60.65	24.95	19.51	39,247.06
Mahindra Manulife Flexi Cap	12.34	24.12	11.63	1,032.64
Navi Flexi Cap Fund	20.22	23.58	15.01	231.77
Invesco India Flexi Cap Fund	12.12	22.92	14.39	1,064.52
DSP Flexi Cap Fund	80.06	22.92	15.08	8,769.99
HSBC Flexi Cap Fund	161.31	22.76	13.90	3,499.16
Edelweiss Flexi Cap Fund	29.31	21.87	13.54	1,277.37
Bank of India Flexi Cap Fund	23.04	21.58	31.36	382.76
Franklin India Flexi Cap Fund	1,219.40	21.57	16.04	11,475.52
Union Flexi Cap Fund	41.24	21.51	13.38	1,582.94
Aditya Birla Sun Life Flexi Cap	1,386.75	20.60	16.35	17,307.29
Kotak Flexicap Fund	66.35	20.29	16.30	39,817.98
ICICI Prudential Flexicap	13.28	20.07	15.13	11,983.15
LIC MF Flexi Cap Fund	80.77	19.66	10.72	467.36
Nippon India Flexi Cap Fund	12.48	19.57	12.17	4,615.64
Canara Robeco Flexi Cap	272.14	19.12	14.63	10,155.25
SBI Flexicap Fund	93.26	19.01	16.30	17,853.03
Samco Flexi Cap Fund	10.66	17.53	4.48	779.15
PGIM India Flexi Cap Fund	31.80	17.52	14.79	6,041.68
Motilal Oswal Flexi Cap Fund	39.79	17.46	16.13	8,368.53
Tata Flexi Cap Fund	18.83	17.45	13.86	2,331.63
IDBI Flexi Cap Fund	42.84	17.21	16.89	382.30
Bandhan Flexi Cap Fund	160.88	16.50	13.93	6,084.04
Shriram Flexi Cap Fund	17.55	16.12	12.40	65.19
Axis Flexi Cap Fund	20.96	15.04	13.95	11,502.38
Taurus Flexi Cap Fund	170.02	13.95	9.61	268.79
UTI Flexi Cap Fund	266.24	10.64	14.57	26,015.84

Data Source: AMFI

First some very interesting numbers pertaining to the flexi cap funds in India. There are a total of 30 flexi-cap funds in India and all these 30 funds have given positive returns in the last one year. The 1-year returns on flexi-cap funds in the last one year ranged from 27.43% on the upper side to 10.64% on the lower side. However, the average mean returns on these 30 flex-cap funds for the last one year stood at an impressive 20.18%. it clearly shows that flexi-cap as an ideas has worked well for the investors. But, what about AUM of flexi cap funds in India?

The total AUM of flexi-cap funds as of June 2023 stood at Rs272,225 crore. That makes it among the more popular equity funds. There are 3 AMCs with AUM in excess of Rs30,000 crore while at total of 10 out of these 30 flexi cap funds have AUM in excess of Rs10,000 crore. With the kind of average returns of 20.18% over the last one year and average returns of 14.85% since inception, the flexi cap funds have surely emerged as a preferred means for investors to participate in equities across the capitalization spectrum. In the last few months, investors have shown a preference for specific funds like flexi-cap, small cap, mid-cap, and thematic funds where there is more scope for the fund manager to use discretion and generate alpha for the investors.

GLANCE AT THE BAJAJ FINSERV FLEXI CAP FUND NFO

Here are some details of the Bajaj Finserv Flexi Cap Fund NFO you must be aware of before you decided on investing in the fund.

The fund opens for subscription on July 24, 2023 and the NFO subscription will close on August 07, 2023. It is an open ended fund that offers continuous purchase and redemption available at NAV linked prices.
Entry loads do not exist in India, but if the fund is redeemed or switched within 180 days from the date of allotment, then there is no exit load for up to 10% of your holdings. However, if you redeem more than 10% of your holdings, exit load at 1% is charged. There is no exit load after holding for 180 days.
The minimum investment in the Bajaj Finserv Flexi Cap Fund NFO will be Rs500 in the NFO and in multiples of thereafter. The fund does rank high on the SEBI Riskometer risk-scale.
The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option, based on what suits their needs.
How will the fund be benchmarked? It will be benchmarked S&P BSE 500 TRI Index. Nimesh Chandan and Sorbh Gupta will be the fund managers for the Bajaj Finserv Flexi Cap Fund.

The Bajaj Finserv Flexi Cap Fund NFO is an opportunity for investors to invest in a fund based on discretionary allocation across large caps, mid-caps, and small caps. It can be effective over the long run as the in-built diversification and the alpha generating abilities of smaller stocks can result in better risk-adjusted returns. Investors in the NFO must be prepared for a longer term perspective of 5-7 years for full benefits of this approach.

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