ETMarkets Fund Guide: Large, mid or smallcap? How a Rs 1.5 lakh crore-fund manager approaches flexicap investing

Largecap, midcap or smallcap? For equity investors, deciding where to put their money can be as challenging as picking the right stocks.

While largecap companies offer exposure to established businesses, mid and smallcap stocks provide access to companies with different growth opportunities, albeit with varying levels of risk.

Flexi-cap mutual funds offer a way to navigate this dilemma by allowing fund managers to invest across all three market-cap segments without being restricted by fixed allocation limits.


The idea is to identify the most attractive opportunities across the market and adjust the portfolio as valuations, business prospects and market conditions change.

But how does a fund manager decide when to favour largecaps over mid or smallcaps? And what should investors look at before choosing a flexicap fund?

The flexibility to invest across market caps does not necessarily mean better returns. The fund manager's investment approach, portfolio construction and ability to navigate market cycles play an important role.

In this edition of ETMarkets Fund Guide, we decode the flexi-cap category with Raunak Onkar, Fund Manager and Research Head at PPFAS Mutual Fund, who manages assets of around Rs 1.5 lakh crore. Edited Excerpts –

Q) What is the total AUM you are managing in the category? What is the name of the fund and when was it launched?

A) Parag Parikh Flexi-Cap Fund manages INR 1,45,070 Crores as of Sept 2026 Factsheet. The fund was launched in May 2013.

Q) What has been the performance of the fund?

A) Since inception the fund has given 17.76% compounded annualised returns.

Q) What determines your allocation between large-, mid- and small-cap stocks? Is the decision driven primarily by valuations, earnings growth, business quality or the stage of the market cycle?

A) Parag Parikh Flexi-Cap Fund manages the equity allocation on a bottom-up basis. The allocation between market caps, sectors and individual businesses depends on the quality of the business, the quality of the management team, the quality of the governance, the execution and capital allocation history of the business, the opportunity size for the particular business / sector, the time in the cycle for that particular business / sector and lastly the valuation it is available at.

Q) How do you distinguish a genuinely attractive business from a stock that is simply trading at a lower valuation? What are the key parameters you evaluate before investing?

A) Businesses operate in a very competitive environment. Competing not just with domestic peers but also global peers. A genuinely good business is the one that is consistently profitable in its business activities.

The business should be able to fund its own future growth with its own cash flows instead of always depending on external funding like debt or equity dilution. It should also across a cycle maintain a reasonable profitability and growth.

If such a business faces any temporary issues and because of that it is available at a very attractive valuation, then it’s a genuinely attractive valuation.

However, some businesses where the business fundamentals are deteriorating due to competitive intensity, pricing pressure, loss of market share, or any other structural reasons and they are available at cheap valuations because of these factors, then it is not worth considering.

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Q) What signals would prompt you to increase large-cap exposure and reduce mid- or small-cap holdings? How quickly can you reposition the portfolio?

A) Exposures to different market cap segments happen on a bottom-up basis. If the business we like to own in the portfolio happen to be in either large, mid or small cap category, the allocation will happen accordingly.

We don’t start with the market cap as the first filter. However, we do check market cap wide valuations on a broad basis to see if the valuations are attractive across the category. Repositioning happens based on the available opportunity and we can gradually allocate towards it.

Q) A flexi-cap fund may outperform during one market cycle and lag during another. How should investors distinguish normal underperformance from a problem with the investment process?

A) Underperformance over shorter time periods is a given in equity asset class. This applies to any equity fund category. That’s why we urge investors to only allocate with more than five years of time horizon when it comes to equity.

Instead of only looking at under performance or outperformance, investors can also focus on the upside / downside capture ratio across the category.

This indicates that how much of the market returns were captured by the fund during uptrends and downtrends.

The goal of equity investing is not just beat the benchmark but also provide the investor with risk adjusted positive absolute return on their investments over a long period of time. This information is available via third party mutual fund comparison websites.

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Q) How can investors tell whether adding a flexi-cap fund improves diversification or creates portfolio overlap?

A) Within the flexi-cap portfolio there might be allocations across different sectors, different geographies, different market caps and varying % allocation to individual businesses along with debt allocation from time to time. That creates its own diversification.

However, at an investor level it will be useful for the investor to check across all the equity schemes they own. They can check how much of the allocation is towards specific sectors or companies.

The benefits of diversification are reduced if the allocation overlaps across all the equity schemes owned by the investors. This information can be checked from the monthly factsheets and the monthly portfolio disclosures of the respective schemes.

Q) How do you decide when to sell a stock? Is it because the valuation has become expensive, the original investment thesis has weakened, or a better opportunity has emerged elsewhere?

A) When the business is trading at an expensive valuation relative to itself, compared to its peers and compared to other opportunities, then definitely it merits a sell.

Sometimes we may invest in businesses with a particular range of outcomes in mind based on the business’ past execution.

If the future looks materially different from the past and our thesis about the business has been proven incorrect, then it’s a good reason to exit from the opportunity and re-asses the business.

Also, sometimes there are sectors which get beaten down due to short term negative sentiments, that also provides an opportunity to allocate across different sectors by selling those where the expectations have increased their valuation.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)