New investors' dilemma: Is flexi cap fund alone sufficient to deploy Rs 10 lakh for meeting goals

A Reddit user recently sparked an engaging conversation in the mutual fund community, outlining their plan to begin investing with a Rs 10 lakh lump sum and monthly SIPs of Rs 50,000–Rs 80,000.

With a long-term horizon of 10 years and a high risk tolerance, the investor questioned the need for multiple fund types, wondering why a single flexi-cap mutual fund wouldn’t suffice for Indian equity exposure.

ETMutualFunds reached out to an expert to understand whether only a flexi cap mutual fund is enough or not for a portfolio and why do investors need other funds as well in their portfolios.

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Flexi-cap funds are designed to offer broad market exposure, giving the fund manager the discretion to shift between large, mid, and small caps as market conditions evolve. “This flexibility makes them a suitable base for most portfolios. However, the drawbacks in relying exclusively on flexi-cap holdings are manager bias and potential for alpha,” said Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance shared with ETMutualFunds.

Minocha adds that one of the main drawbacks is the potential manager bias, where fund managers often allocate a large portion of the portfolio to large-cap stocks in order to minimize volatility which can lead to underexposure in high-growth mid and small-cap segments, especially during market phases where these segments outperform.

Additionally, if the time horizon is long (say 10+ years), making dedicated investments in mid and small-cap funds through SIPs can generate better returns if the investor can bear the higher volatility and asset allocation discipline is very important, Minocha said and also recommended that one should never go overboard on risky categories, so that some allocation lands into stable options such as large cap or flexi cap, which can be conveniently redeemed in emergencies without much drawdown.

With the stock prices running high, investors are staying away from the market and looking for investment options where they can make investments and whether they should go for lumpsum or SIP investments in the volatile market.

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Addressing this concern of many investors and the reddit user having a lumpsum amount to deploy and further to start SIPs, Minocha recommends that putting the lump sum of Rs 10 lakh into the market all at once is not a good idea and should be staggered even for the long-term investor as this protects an investor from short-term volatility in the market and allows for averaging out the purchase price.

He further adds that in practice, one may park the lumpsum in a liquid or ultra-short duration debt fund while using a Systematic Transfer Plan (STP) to invest in equity mutual funds automatically over the next 6-10 months, balancing the risks of timing the market and capital deployment.

“For the SIP portion, a diversified approach can mean balancing growth and risk. The core holding would be a flexi-cap, alongside a mid-cap fund for extra long-term growth potential. To a small degree, small-cap can be employed for alpha generation,” said Minocha.

One should always make an investment decision based on investment horizon, risk appetite, and goals.

(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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