Subscribers' Hangout - August edition

Dhirendra Kumar: Welcome to Subscribers' Hangout. I'm here with my team to answer your questions. The markets are at an all-time high, and your questions amply reflect the anxiety or the happiness or trying to dissect what is going on. So, let me start with Saurabh's question: Why do most flexi-cap funds have maximum allocation in large-cap stocks in their portfolio? Even now, mid-cap and small- cap stocks are doing very well. But still, most of the fund managers have not moved their money to mid and small caps. So, I found this is against the theme of flexi caps - they were supposed to anticipate what will work better or what will work. If fund managers cannot timely change, then what is the use of such funds? Rather I found multi-cap funds are better if you want some exposure to small and mid-cap stocks. Ashutosh Gupta: Yeah, so, first of all, both flexi-cap and multi-cap funds are meant to achieve the same kind of investing need. Both of them are diversified equity funds, which are suitable for wealth creation and generally meant to be held for a long period of time. Now, where things diverge is that within their go-anywhere approach, flexi-cap funds have a slightly higher flexibility because over there, their investment mandate gives the fund manager complete flexibility to invest in any market segment and in any proportion. So theoretically speaking, a flexi-cap fund can be entirely in large- cap stocks or mid-caps or even small-caps if the fund manager so wishes. In contrast, multi-cap funds have a slightly more restrictive mandate because, by regulatory restriction, they have to invest at least 25 per cent of their money in each of the market segments - that's large cap, mid cap and small cap. But what this forced asset allocation also means is that they are always more diversified. And they would always give you a better representation of the entire market spectrum in your portfolio. And, as this subscriber rightly pointed out that it's a matter of scale that a lot of flexi-cap funds, because of their increasing size, have been somewhat forced to have a large cap tilt in the portfolio. And we anticipate, given the size and scale of these funds, that is likely to be the case going forward as well. While multi-caps are relatively better positioned to provide a more broad-based exposure. Now, when we look at the near-term returns, of course, this is also visible in the performance because the mid cap and small-cap segments have done relatively better in the last one year. And by virtue of investing more in these segments, multi-cap funds have outperformed the flexi-cap funds on a long- term horizon. This may just be likely to be the case going forward as well, simply because of their higher mid and small-cap allocation. Even though it would come with higher volatility during periods of market falls. But these funds are relatively young. This category itself came into being for less than three years now. But I anticipate that some of the better ones in the multi- cap category over a period of time will find their way into our Analysts' Choice list. So just look out for that. Dhirendra Kumar: Okay, now Jayanta is asking that, given the sharp increase in the stock price in June and July so far, on the back of investment from FIIs and DIIs, what can lead to market correction now? So he is a scared investor - what will lead to corr

This article was originally published on August 14, 2023.