Flexi-cap funds is the new category introduced by SEBI, which allows the fund to follow dynamic investment approach and offers it the flexibility to invest across market cap segment, as per the conviction of the fund manager. If you are looking to invest in a fund that has complete freedom to decide on the market cap allocation to be held in the portfolio and take advantage of changing dynamics to generate higher alpha, you can consider adding flexi-cap fund to your portfolio.

Since no particular market cap can be an outperformer every year, investing in a fund that takes exposure across market cap viz. large-cap, mid-cap, and small-cap can help you to lower the impact of volatility on your portfolio and thereby earn better risk-adjusted returns.

While selecting a flexi-cap fund to your portfolio pick a scheme that has a long term track record of delivering superior risk-adjusted returns. Also ensure that the scheme fares well on qualitative parameter.

Kotak Flexi Cap Fund, erstwhile Kotak Standard Multicap Fund, is the most popular scheme in the flexi-cap funds category that has constantly outperformed the benchmark and category average across market cycles in the past.

Graph 1: Growth of Rs 10,000 if invested in Kotak Flexi Cap Fund 5 years ago

Data as on March 10, 2021
(Source: ACE MF) 

KFCF has shown reasonable growth across market conditions and has rewarded investors with market-beating returns over longer time periods. Classified under flexi-cap funds category, KFCF holds exposure across market caps, but with a large-cap bias. KFCF currently has a corpus of over Rs 34,500 crore under its management, the largest in the category, which nearly raises concern about its capacity. However, the large-cap orientation of the fund still offers it some flexibility to accept more investors. By generating a compounded annualised return of around 18.2% over the past 5 years, KFCF has outpaced its benchmark Nifty 200 – TRI index by a CAGR of nearly 2 percentage points. Notably, the index has appreciated at 16.5% CAGR. Every Rs 10,000 invested in the fund, 5 years back, would have been worth Rs 23,101. A simultaneous investment in the benchmark would have stood at Rs 21,506 over the same time period.

Table: Kotak Flexi Cap Fund’s performance vis-à-vis category peers

Scheme Name	Corpus (Cr.)	1 Year (%)	2 Year (%)	3 Year (%)	5 Year (%)	7 Year (%)	Std Dev	Sharpe
UTI Flexi Cap Fund	15,746	49.14	26.21	19.93	18.93	18.21	21.74	0.198
PGIM India Flexi Cap Fund	676	65.74	29.89	19.48	19.70	—	23.09	0.177
Axis Flexi Cap Fund	7,460	34.55	23.23	19.31	—	—	17.94	0.213
Parag Parikh Flexi Cap Fund	7,452	52.84	25.45	18.52	19.62	19.40	18.82	0.215
Canara Rob Flexi Cap Fund	3,484	41.28	22.13	17.41	19.03	16.63	19.71	0.173
DSP Flexi Cap Fund	4,873	37.84	23.99	16.22	19.07	18.52	22.41	0.143
Union Flexi Cap Fund	465	47.43	22.28	15.42	16.07	13.62	20.84	0.140
JM Flexicap Fund	162	34.63	21.21	14.65	19.11	18.68	21.56	0.128
Kotak Flexicap Fund	34,515	40.70	18.40	14.45	18.22	19.11	21.88	0.127
Edelweiss Flexi Cap Fund	667	42.00	19.46	13.62	18.32	—	21.45	0.119
Nifty 200 – TRI		47.21	18.15	13.95	16.54	15.05	22.28	0.120

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on March 10, 2021
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

KFCF has a track record of topping category returns in the past. The fund has shown a stellar performance across time periods and has significantly outperformed its benchmark and many of its category peers. However, in the last one year the fund found itself struggling to keep up with the benchmark and the category average. Nonetheless, over the longer time periods of 5 years and 7 years the fund outperformed the benchmark – Nifty 200 – TRI index by a noticeable margin; and has also fared better than many of its other popular category peers.

KFCF has shown fair level of stability as well. Its standard deviation of 21.88% signifies that the fund’s volatility has been nearly in line with the category average (21.58%) and the benchmark (22.28%). In terms of risk-adjusted return, the fund’s Sharpe Ratio of 0.13 is slightly better than the category as well as its benchmark. Though the fund has seen a drop in its risk-adjusted returns over the past few months, the fund has the potential to recover and get back on track.

Investment strategy of Kotak Flexi Cap Fund

KFCF was initially launched with a mandate to follow focused investment strategy across few selected sectors. However, post implementation of SEBI classification norms in 2018, KFCF was placed under multi-cap funds category, where it was mandated to hold exposure across market caps. The earlier multi-cap mandate allowed the fund to continue with its strategy of focusing on few chosen sectors, while holding exposure across market caps. Nevertheless, in absence of any minimum threshold for exposure to a certain market cap the fund held a large cap bias. In September 2020, SEBI framed new allocation rules for multi-cap funds which requires them to invest at least 25% of the corpus each in large caps, mid caps, and small cap stocks. The new guidelines defined for multi-cap funds is not suitable for a large sized funds like KFCF. Hence it switched to the newly introduced Flexi-cap category where there is no restriction in terms of allocation to any market cap for the fund.

While selecting stocks for KFCF’s portfolio the fund manager follows a combination of top down and bottom up approach to stock picking. The focus is on certain sectors that the fund manager believes will perform better in the economy, and applies bottom up approach to pick stocks within the selected sectors. The funds core portfolio comprises of 5-6 sectors together totalling to around 60-70% of its assets. Even though KFCF follows a focused approach towards few selected sectors, it tries to ensure that the top 10 stocks do not breach the 50% mark. Focusing on long term growth opportunities, from selected stocks and sectors, the fund manager largely follows buy and hold investment strategy and holds high conviction stocks in the portfolio for the long term. The fund has seen low churning with its portfolio turnover ratio being well below 20% mark in the last couple of years.

Graph 2: Top portfolio holdings in Kotak Flexi Cap Fund

Holding in (%) as on February 28, 2021
(Source: ACE MF)

​KFCF usually holds a well-diversified portfolio of around 50 to 60 stocks. As on February 28, 2021, the fund held around 50 stocks in its portfolio, with top 10 stocks together constituting about 50.3% of its assets. While creating the portfolio, the fund manager limits his picks to not more than 5-6 stocks from a single industry. Top large cap names like ICICI Bank, Reliance Industries, HDFC Bank, Infosys, and Ultratech Cement currently appear among its top portfolio holdings. TCS, Axis Bank, L&T, HUL, SBI, etc. have been among the other core holdings in the fund’s portfolio.

Large cap names like Reliance Industries, Infosys, Ultratech Cement, HDFC bank, ICICI Bank, TCS, Jubilant FoodWorks, L&T, etc. have been the top contributors to KFCF’s returns in the last one year while it has also benefitted from mid cap names like Jindal Steel & Power, Bharat Electronics, SRF, among others.

Around 30.2% of the fund’s portfolio is allocated to stocks in the Banking and Financial sector, followed by Infotech, Cement, Consumption, and Engineering. These top sectors together account for around 67% of its assets. Petroleum Products, Auto Ancillaries, Oil & Gas, Pharma, Auto, and Transportation are among the other core sectors in the fund’s portfolio. The fund holds a healthy mix of cyclicals and defensive sectors.

Suitability

KFCF has recently switched to the new Flexi-cap category which will allow it to hold flexibility in terms of allocation across market caps, without any restriction. The change in categorisation is not expected to have any impact on the investment style and strategies adopted by the fund. Following active management strategy, KFCF focuses on attractive looking sectors and stocks within those sectors. The fund manager has proven his ability to timely identify and capture available opportunities and create significant wealth for long term investors in KFCF.

However, the fund’s concentrated exposure to select sectors may result in short term underperformance, if any of its core sector holdings disappoint or is under pressure. Moreover, the larger size of the fund may become a hurdle in shifting focus instantly across sectors.

This makes KFCF suitable for long term investors looking for wealth creation from a fund having the flexibility to invest across market capitalisation range.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here