Mutual fund investors often grapple with the decision of where to allocate their money for optimal returns. Two popular categories that frequently come under consideration are mid-cap funds and flexi-cap funds.
Each has its unique characteristics, risks, and potential rewards, making the choice dependent on individual investment goals, risk tolerance, and market conditions.
Understanding mid-cap funds
Mid-cap funds invest primarily in mid-sized companies.
These companies, typically ranked between 101st and 250th by market capitalisation, are often considered to be in their growth phase.
Mid-cap stocks can offer growth potential because these companies have the agility to adapt and expand quickly compared to their larger, more established counterparts.
Advantages of mid-cap funds
High growth potential: Mid-cap companies are at a stage where they can potentially grow rapidly, leading to capital appreciation.
Diversification benefits: Investing in mid caps adds a layer of diversification to a portfolio predominantly composed of large-cap stocks.
Risks of mid-cap funds
Volatility: Mid-cap stocks can be more volatile than large-cap stocks, experiencing larger price swings in response to market conditions.
Liquidity risks: Mid-cap stocks may not be as liquid as large-cap stocks, making it harder to sell them quickly without impacting the stock price.
Understanding flexi-cap funds
Flexi-cap funds offer a more flexible approach to investing.
These funds can invest in companies of any size — large, mid, or small caps — depending on where the fund manager sees the best opportunities.
Advantages of flexi-cap funds
Flexibility: The fund manager can dynamically allocate assets across different market capitalisations based on market conditions and opportunities.
Deepak Gagrani, Founder of MADHUBAN FINVEST, advocates for flexi-cap funds due to their adaptable nature in portfolio allocation.
He highlights their capacity to dynamically adjust across different market capitalisations, allowing fund managers to strategically move funds around and potentially reduce the impact of market downturns or volatility.
Risk management: By diversifying across various caps, flexi-cap funds can better manage risks and minimise losses.
Chakravarthy V, Co-Founder and Director of Prime Wealth Finserv, echoes this, emphasising active management style of flexi-cap funds which allows for continuous monitoring of market trends.
Risks of flexi-cap funds
Manager dependency: The performance of flexi-cap funds heavily relies on the fund manager's ability to make the right allocation decisions.
Market timing: Misjudging market conditions or the potential of specific sectors can lead to underperformance.
So, which is a better investment?
Choosing between mid-cap and flexi-cap funds depends on several factors:
Risk tolerance: Investors with a higher risk tolerance and a longer investment horizon may prefer mid-cap funds for their growth potential despite the higher volatility.
Conversely, those seeking a more balanced approach might lean towards flexi-cap funds due to their diversified nature and relative stability.
Investment goals: If the goal is aggressive capital appreciation, mid-cap funds might be more suitable.
However, for investors looking for a balanced growth strategy that can adapt to market changes, flexi-cap funds could be the better option.
Market conditions: During bull markets, mid-cap funds often outperform due to their growth potential.
In contrast, in uncertain or bearish markets, flexi-cap funds may provide better risk-adjusted returns due to their diversified portfolio.
Conclusion
There is no one-size-fits-all answer when it comes to choosing between mid-cap and flexi-cap funds.
Both have their merits and potential downsides.
Investors should assess their financial goals, risk tolerance, and market outlook before making a decision.
