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Investing in a flexi-cap fund or a focused equity fund

Both serve the same investing need and your selection should depend on the level of diversification in your portfolio, suggests Ashutosh Gupta

Should I invest in a flexi-cap fund or a focused equity fund?
- Vivek Sharma

Well, both of them are meant for a similar investing need, which is to generate wealth through capital appreciation over the long term. Also, both of them also have a pretty similar universe of stocks from which they create their portfolios. The main difference lies in the number of stocks they hold.

In the case of focused funds, by mandate, they cannot invest in more than 30 stocks at any given point in time. On the other hand, there is no such restriction in the case of flexi-cap funds. Different flexi-cap funds vary significantly in terms of the number of stocks that they invest in. So, you can find certain funds which invest in even lesser than 30 stocks by choice but then there are other funds that are much more diversified and maintain a portfolio of well over 60 stocks at any given point in time.

Focused funds tend to be more high conviction and more concentrated strategies typically made of a fund manager's best stock ideas but they also tend to be riskier because of the higher level of concentration. But at the same time, they can also be much more rewarding if the fund manager's calls go right. In fact, there are fund managers who have exhibited the capability to run a focused strategy fairly well with a high degree of consistency.

So, I would broadly say if you are looking to invest in only one fund, then avoid a focused fund and pick one from the flexi-cap category because their high degree of diversification would be of greater value. But if you are looking to create a portfolio of two-three or more funds, then it doesn't really matter whether you go for focused funds or flexi-cap funds. This is because if you create a portfolio of two-three funds and all of them are focused funds, even then at an overall-portfolio level, you would be fairly diversified at the stock level.

In fact, for that very reason, we don't make a distinction between focused funds and flexi-cap funds when we rate or rank them. Since they serve the same investing need and they effectively compete for the same share of an investor's allocation, we believe that they should be clubbed together to facilitate a better comparison and that is why we put them in one category. So, on Value Research Online, if you go to the flexi-cap category list of funds, it would have both the focused as well as the flexi-cap funds for you to compare and pick one for yourself.

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