Why flexi-cap returns aren't built on chasing multibaggers

Summary: Flexi-cap funds have the freedom to invest across the market. However, when it comes to discovering multibaggers, they haven’t had tremendous success. But does the number of multibaggers in a flexi-cap fund’s portfolio impact its returns? Let’s find out.

Roger Federer is widely regarded as one of the greatest tennis players of all time. But not every shot he played was a winner. Some were unforced errors. Others sailed just wide or landed a fraction too long. Even the best get plenty wrong along the way.

Flexi-cap funds work much the same way. By design, they have the freedom to invest across the market. But that flexibility doesn’t mean every stock pick turns into a winner or a multibagger. Some bets work beautifully, others don’t, and that’s entirely normal. What matters isn’t perfection, but how those decisions come together and whether they translate into strong returns in the long run.

Finding multibaggers is no child’s play

A quick look at the table below makes one thing clear: not every stock picked by a flexi-cap fund turns into a multibagger. Even the largest and most seasoned funds in the category manage to find big winners only occasionally.

Take Edelweiss Flexi Cap Fund as an example. Over the past three years, the fund invested in nearly 201 stocks. Of these, just 21 went on to become multibaggers.

Union and Aditya Birla’s flexi-cap funds followed suit. While the Union Flexi Cap Fund discovered 21 multibaggers from its 248 holdings, Aditya Birla Flexi Cap  Fund saw 20 of its 173 stocks rise more than 3x. Interestingly, although these three funds have varying investment styles, the frequency of multibaggers finds doesn't differ much.

Does having more multibaggers imply better returns?

Though not all stock picks have gone on to grow 3x, this hasn’t had a material impact on a flexi-cap fund’s performance. For instance, the Parag Parikh Flexi Cap Fund invested in over 130 stocks over the last six years. Of these, only 12 of its holdings became multibaggers. Yet, this had no impact on the fund’s returns, as it continued to remain among the top performers in the category.

A key reason behind the same is portfolio allocation. Typically, funds initially place very small weights on their fastest-growing stocks. This implies minimal impact on its returns. Thus, even if a stock grows 5x, but its average allocation is barely 0.4 per cent or 0.5 per cent, its impact on total returns is limited.

Another reason is that flexi-cap funds also hold numerous stocks that neither rise too fast nor fall too fast. While this move stabilises the portfolio, it also reduces the effect of multibaggers. Ultimately, here too, impact is more important than frequency. A single big winner, weighted appropriately, can outweigh many average multibaggers.

That is why the real question in flexi-cap funds is not how many multibaggers were found, but when, with what weight and for how long the fund manager continued to hold them.

So, which flexi-cap fund should you choose to invest in?

Choosing a flexi-cap fund to invest in shouldn’t be based on the number of multibaggers in its portfolio. What you should consider is your risk appetite, financial goals and time horizon before investing.

This is where Value Research Fund Advisor comes in. It not only looks at fund returns, but also considers allocation changes, fund behaviour during downturns, portfolio quality and long-term consistency. What’s more, you can also get a list of our recommended flexi-cap funds that are aligned with your financial goals and investing style.

Ultimately, the winner in flexi-cap investing is the one who chooses funds that can survive every market cycle, not just the loudest name.

Explore Fund Advisor today

Also read: These 5 flexi-cap funds tripled investor money in just 5 yrs