How flexi cap funds help diversify your investment portfolio?

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While the stock market can offer high returns on investments, investors can also face heavy losses when the market experiences a downturn. One of the best ways to protect your investments against stock market fluctuations is by increasing the diversification of your investments. Flexi-cap mutual funds have emerged as a powerful way for investors to introduce flexibility and diversity in their portfolios. In this article, we will take a closer look at what flexi-cap funds are and how investors can incorporate them into their investment strategy.

What are flexi-cap funds?

Flexi-cap funds are a type of equity mutual fund that can invest in companies across different market capitalisations – including large, mid and small-cap market segments, without any strict restrictions on resource or asset allocation. As per SEBI guidelines, flexi-cap funds must invest at least 65% of their assets into equity stocks. Unlike traditional mutual funds, flexi-cap mutual funds are dynamic and flexible, allowing fund managers to adjust investments and allocate resources as per changing market conditions for potentially higher returns.

Diversification benefits of investing in flexi-cap funds

Here are some of the major diversification-related benefits of investing in flexi-cap funds you should know about:

Adaptive investment strategy: Since these types of mutual funds are flexible in nature, fund managers can make strategic changes in the investments between large, mid and small-cap stocks depending on changing market cycles and economic conditions. This flexibility can help fund managers navigate market volatility and improve profitability while reducing risk.

Balanced risk: Since a flexi-cap mutual fund invests in small, mid and large-cap stocks, it reduces the risk of concentrating investments into a single type of stock. This enhances the diversification of your investments and reduces losses when one segment (for instance, small-cap stocks) underperforms compared to the rest of the market.

Potential for higher returns: With the option to invest in stocks across multiple markets capitalisations, fund managers can take advantage of periods of economic boom by investing in emerging mid-cap and small-cap stocks that experience high growth while maintaining stability through a portion of investments in stable large-cap stocks.

Considerations for investors

While the benefits of flexi-cap mutual funds may seem appealing, here are some considerations that investors must be aware of:

Risk appetite: Although flexi-cap mutual funds offer diversity, they are not devoid of risk. A large portion of flexi-cap mutual funds are invested in equity stocks, including mid-cap and small-cap funds. Carefully consider your risk appetite and long-term financial goals before investing in them.

Choosing flexi-cap funds: Make sure to compare the expense ratios and historical performance of multiple flexi-cap mutual funds and make an informed decision about which flexi-cap fund to invest in.

To conclude

Flexi-cap mutual funds offer a great way for investors to increase the variety of their investments and potentially earn higher returns. Through dynamic asset allocation and balanced risk, flexi-cap mutual funds are ideal for investors seeking to diversify their investment portfolios. However, investors must do their own extensive research before investing in any new type of mutual fund.