Flexi-cap fund is a relatively new category under equity mutual funds that invests dynamically across market caps. SEBI had asked multi-cap funds to invest at least 25% of the corpus each in large-caps, mid-caps, and small-cap stocks. This is why most multi-cap funds have now switched to the flexi-cap category to retain their original portfolio characteristics.

The flexi-cap fund category allows fund managers to invest wherever value and opportunities are available without having to worry about liquidity and valuation concerns.

Multi-cap funds and Flexi-cap funds invest across market capitalization, which makes them riskier than pure large-cap funds and large & mid-cap funds, but less risky than pure mid-cap funds and small-cap funds.

As an investor, if you are looking to have a balanced exposure across market caps, you can opt for multi-cap funds. Else, if you do not have a very high risk appetite you can consider investing in flexi-cap funds.

Kotak Flexi Cap Fund is the most popular scheme in the flexi-cap fund category that has a track record of rewarding its long-term investors with superior gains.

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

Data as on August 17, 2021
(Source: ACE MF) 

Kotak Flexi Cap Fund, earlier known as Kotak Standard Multicap Fund, is a Flexi-cap fund that has shown reasonable growth across market conditions. The fund has the flexibility to dynamically allocate assets across market caps, though it prefers to maintain a large-cap bias. Kotak Flexi Cap Fund’s extraordinary performance during the past bull and bear market phases attracted many investors. It currently has a corpus of over Rs 37,000 crore under its management (the highest in the category), which nearly raises concern about its capacity. However, the large cap orientation of the fund still offers with it some flexibility to accept more investors. Over the last five years Kotak Flexi Cap Fund has generated returns at 15.6% CAGR which is nearly in line with the 15.1% generated by its benchmark Nifty 200 – TRI. An investment of Rs 10,000 invested in the fund 5 years back would have been worth Rs 20,689. Following active management strategy, Kotak Flexi Cap Fund focuses on attractive looking sectors and stocks within those sectors.

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

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
PGIM India Flexi Cap Fund	1,689	72.37	45.45	25.57	21.02	—	23.34	0.26
Parag Parikh Flexi Cap Fund	13,187	55.00	39.16	23.36	21.71	19.34	19.06	0.28
UTI Flexi Cap Fund	20,922	64.40	36.96	18.98	18.16	16.72	21.85	0.21
DSP Flexi Cap Fund	5,985	62.09	31.61	18.86	17.69	16.54	22.52	0.20
Canara Rob Flexi Cap Fund	5,185	53.98	31.90	18.73	18.62	15.42	19.92	0.20
Union Flexi Cap Fund	645	57.71	31.75	18.22	15.60	12.72	21.18	0.19
Aditya Birla SL Flexi Cap Fund	15,023	58.15	28.34	15.39	15.94	16.29	23.15	0.16
SBI Flexicap Fund	14,346	56.57	24.97	15.15	15.42	16.97	22.13	0.16
Kotak Flexicap Fund	37,097	47.47	23.03	14.19	15.64	16.77	22.02	0.14
HDFC Flexi Cap Fund	25,436	55.86	20.52	12.65	14.10	12.31	25.60	0.13
NIFTY 200 – TRI		51.31	25.05	13.94	15.11	13.34	22.42	0.16

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on August 17, 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.

Kotak Flexi Cap Fund has a record of topping the category returns; it constantly outperformed the benchmark and category average across market cycles in the past. However in the last couple of years, 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’s performance was competitive with its benchmark Nifty 200 – TRI index and many of its other popular category peers.

Kotak Flexi Cap Fund has shown fair level of stability as well. Its standard deviation of 22.02% signifies that the fund’s volatility has been nearly in line with the category average (21.73%) and the benchmark (22.42%). The underperformance in the last couple of years has resulted in a drop in its risk-adjusted returns (denoted by Sharpe ratio) over the past few months. However, the fund deserves some time to recover and get back on track.

Investment strategy of Kotak Flexi Cap Fund

Kotak Flexi Cap Fund is a flexi-cap fund that invests dynamically across market caps, but with a large cap bias. The fund invests around 65%-75% of its assets in large-caps and 15-30% in mid-caps. The balance is allocated in small-caps as well as cash and equivalents. Kotak Flexi Cap Fund remains fully invested in equities at all times.

When selecting stocks for Kotak Flexi Cap Fund’s portfolio, the fund manager follows a combination of the top-down and bottom-up approach to stock picking. The fund manager focuses on certain sectors that are expected to perform better in the economy and then applies the bottom-up approach to pick stocks within the selected sectors. The fund’s core portfolio comprises of 5-6 sectors together totalling to around 60-70% of its assets. Even though Kotak Flexi Cap Fund 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 July 31, 2021
(Source: ACE MF) 

Kotak Flexi Cap Fund usually holds a well-diversified portfolio of around 50 to 60 stocks. As on July 31, 2021, the fund held around 50 stocks in its portfolio, with top 10 stocks together constituting about 51.6% of its assets. When 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, Infosys, Ultratech Cement, HDFC Bank, Reliance Industries, and currently appear among its top portfolio holdings. TCS, SRF, L&T, Axis Bank, HUL, etc. have been among the other core holdings in the fund’s portfolio.

Kotak Flexi Cap Fund’s significant weightage in names like ICICI Bank, Ultratech Cement, SRF, Infosys, and L&T, turned out to be most rewarding in the last 2 years. Companies like Jubilant FoodWorks, HDFC Bank, Axis Bank, Jindal Steel & Power, Bharat Electronics, etc. have been the other major contributors to its performance.

Around 29% of the fund’s portfolio is allocated to stocks in the Banking and Financial sector, followed by Infotech, Cement, Engineering, and Auto Ancillaries. These top sectors together account for around 66.8% of its assets. Consumption, Petroleum, Pharma, and Oil & Gas are among the other core sectors in the fund’s portfolio. The fund holds a healthy mix of cyclicals and defensive sectors.

Suitability

Kotak Flexi Cap Fund carries an impressive long-term track record under the supervision of its fund manager Mr Harsha Upadhyaya. The fund manager has proven his ability to timely identify and capture available opportunities and create significant wealth for long term investors. While the fund remains heavyweight on cyclicals to ride the market boom and rallies, it also makes well use of defensives during extreme market conditions. This helps the fund perform consistently across market phases.

Although it is quite easier to switch sector focus with a small corpus, the larger size of the fund may become a hurdle in shifting focus instantly across sectors. With pre-dominant allocation in large caps, the fund’s performance may differ from its peers holding higher allocation to mid and small caps.

Kotak Flexi Cap Fund is suitable for long term investors looking for wealth creation from a fund having the flexibility to invest across the 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