Why is this flexi-cap fund struggling to beat its benchmark?

Summary: UTI Flexi Cap Fund, India’s oldest flexi-cap fund, has been trailing its benchmark for quite some time. Here, Ajay Tyagi, Head of Equity at the fund house, delves into the reasons behind its underperformance.

Over the past year, UTI Flexi Cap Fund returned 4.15 per cent, well behind its benchmark, the Nifty 500 TRI, which delivered 14.18 per cent during the same period. But this isn’t a one-off slip. The fund has been trailing both its benchmark and peers for a while now, testing investor patience.

Ajay Tyagi, Head of Equity at UTI Mutual Fund, attributes this prolonged lag to the fund’s quality-growth tilt in a market dominated by cyclicals and value stocks. According to him, the gap reflects a broader market style cycle rather than any change in the fund’s investment process. The focus, he argues, remains on staying consistent rather than chasing short-term market leadership.

When quality falls out of favour

UTI Flexi Cap Fund’s recent struggles haven’t come from a single wrong bet, but from the kind of market we’ve seen over the past few years. Leadership has shifted towards metals, global cyclicals and other value-heavy segments, while consumption-oriented and steady compounding businesses have been left behind.

Since the fund is positioned around predictable cash flows, strong balance sheets and earnings durability, it has found it difficult to keep pace with the market’s preference for cheaper, cyclical plays.

“While the specific sectors driving underperformance may have changed from year to year, the overarching theme has remained the same: quality has continued to significantly underperform value,” Tyagi said. “That has been a constant over the last four years, including 2025.”

Tyagi points to long-term factor data to support this stance. Over the past two decades, quality stocks have historically delivered slightly better returns with lower volatility, even though the last four years have been unusually tough for the style.

Despite the extended slump, the fund’s strategy remains anchored in earnings growth, with the belief that fundamentals eventually assert themselves.

Underperformance spills over to other funds

The muted performance is not limited to the UTI Flexi Cap Fund alone. Over medium- and long-term periods, the AMC’s large-cap and mid-cap schemes have also lagged.

Here too, Tyagi stresses the importance of sticking with a defined investment approach rather than abandoning it during phases when the market turns against the style.

“The reality is that, because of how our funds are positioned, there will be periods when certain schemes remain under pressure simply because the style they follow is out of favour,” he said. “That, in itself, does not necessarily indicate a problem with the process.”

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