Looking for best flexi-cap mutual fund? Experts explain why strategy matters more than returns

Choosing the right flexi-cap mutual fund has become increasingly crucial for investors navigating volatile markets while aiming for long-term growth. With several top-performing schemes available, many gravitate toward popular picks, but experts caution that selecting the best fund requires looking beyond past returns to assess strategy and risk profile.

A viewer of The Money Show on ET Now, Zeenat, raised a similar query—what makes the Parag Parikh Flexi Cap Fund so popular, and how should investors identify the best option within the flexi-cap category?

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According to Harshvardhan Roongta, CEO, CFP, Roongta Securities, the fund selection should be based on a mix of qualitative and quantitative factors. While investors often rely on recent performance and rankings on online platforms, this approach can be misleading. Instead, one should evaluate how much risk a scheme is taking and the return it is generating per unit of that risk.

“There are so many factors that have to be considered before you pick any scheme. There are qualitative factors. There are quantitative factors in the form of some ratios that you will need to see, how much risk a scheme is taking, what is the return it is generating per unit of risk that it is taking,” the expert said.

He mentioned that investors only look at past performances based on some online portal comparisons and choose the scheme that is performing best in the recent past and that is not really how one should select the fund.

He also highlighted that even the best fund managers experience performance cycles. There may be phases when their strategies do not immediately reflect in returns due to market conditions, but that does not mean that the fund manager is not good. Patience is often key, as performance tends to even out over time.

Roongta said they could just take their own time for turnaround and it would reflect in the returns over a period of time. There are lots and lots of factors that go into selecting a scheme, not just simply looking at past returns

Giving a comparison within the flexi-cap category further shows how different funds adopt varied approaches. Roongta compared two funds - Parag Parikh Flexi Cap Fund and HDFC Flexi Cap Fund.

For instance, the Parag Parikh Flexi Cap Fund has an AUM of 1,30,000 crore and currently holds around 20% in cash, which means 80% of this Rs 1,30,000 crore has been invested into stocks. This cash buffer allows the fund to deploy capital during market corrections, potentially limiting downside risk.

The expert said, “They bought into shares, and that is their holding. 20% of that money is lying in cash waiting to be deployed in the market and the fund management team apparently believes that markets maybe subdued and if there is further correction, they will get an opportunity to invest further into it, so for which they need the dry power, they need money in their hand which they can deploy once the market corrects, now that is the outlook of the fund manager.”

On the other hand, the HDFC Flexi Cap Fund has a lower cash allocation of about 10%, meaning it is more invested in equities or 90% of their money is invested into the markets currently, and 10% is what it has kept as reserves that if the market corrects they would have some liberty to park fresh money.

Now, in a scenario like this, if the markets were to fall from here because war intensifies, etc, and the markets fall down from here, Parag Parikh Flexicap will outperform because they have invested only 80% right now and 20% is still in cash, and they can deploy further. So, the losses will be lesser in case of Parag Parikh as compared to HDFC, being 90% investment.

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But if the war suddenly comes to an end, and the markets rise sharply, one will see that the HDFC Flexicap Fund will perform better than Parag Parikh Flexi Cap Fund purely because of the fact that 90% is invested in the market by the HDFC Mutual Fund’s flexi cap fund.

This contrast shows that even among top funds in the same category, investment styles and portfolio positioning can differ significantly. Therefore, investors should assess parameters such as asset allocation, portfolio construction, and risk-adjusted returns before making a decision.

Roongta suggests that investors shortlist the top five to ten funds in a category and then evaluate which one aligns best with their financial goals and risk appetite. Interacting with fund managers, where possible, and understanding their investment philosophy can also provide valuable insights.

The expert recommended, “Go into the portfolio construction, maybe, look at certain factors. Of course, if you have an opportunity to interact with the fund managers in the investor meets, go and meet them, listen to them, so you will understand whether your thoughts align with each other or not. So, these factors will determine which scheme you should pick amongst the top 5 or 10 in any category.”

While the Parag Parikh Flexi Cap Fund remains a strong and popular choice, investors should avoid selecting any fund solely based on recent performance. A well-informed, research-driven approach is essential to building a resilient mutual fund portfolio.

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

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