Will the flexi cap bubble burst? At the outset we would like to state that although this may sound like an intimidating prophecy, our intention is to simply caution investors.
We are witnessing at present what can be termed as 'irrational exuberance' in favour of flexi/multi cap fund IPOs. Simply put, these are mutual fund schemes which have the flexibility to invest in stocks across market segments (large caps, mid caps, small caps); hence the fund manger is equipped to invest in the 'in flavour' market segment.
While there is nothing intrinsically wrong with flexi/multi cap funds, investors should be aware of the risks they take on by investing in such funds.
The fund manager is at all times on the lookout for the next big investment opportunity. Consequently the portfolio is likely to be churned rapidly; aggressive bets taken and safety may be compromised to clock growth.
These funds would clearly classify as far riskier propositions vis-à-vis their counterparts in the regular diversified equity funds segment. There is an urgent need for investors to assess if they need such a product in their portfolios and also what proportion of their portfolios needs to be invested in the same.
In fact the investor enthusiasm at present is fairly similar to the one which was witnessed in December 2004; monthly income plans (MIPs) were then the season's flavour.
MIPs were perceived as wonder products which provided the stability of debt and power of equities. Distributors and investment advisors played their part by selling MIPs as investment avenues offering assured returns.
The consequent turnaround in markets and MIPs' fall from grace has been very well chronicled.
Rank top performing Monthly Income Plans
While MIPs as an investment avenue were truly a unique investment proposition, investors' perceptions about the same were perhaps too exaggerated; also the risks involved and the downside of investing in MIPs was probably never adequately conveyed to investors.
A similar situation could arise in the flexi cap segment as well. Currently flexi/multi cap schemes are being touted as the best things to have happened to the mutual fund industry. Rising markets have added to this phenomenon; fund houses have also contributed to this cause by launching a string of IPOs.
We believe investors should adopt a pragmatic approach while dealing with investments in the string of flexi/multi cap IPOs. Here's a checklist for investors,
Determine if the IPO fits in your risk-return appetite and then make an investment decision.
Decide what portion of your portfolio should be invested in the IPO, again due consideration must be given to your risk appetite and investment objectives.
Finally, decide whether you should invest during the IPO period or after the scheme is open for regular investments. Investors, especially the ones focused on the Rs 10 net asset value should note that in the recent past some mutual fund IPOs have opened below Rs 10.
Our advice to investors would be to participate in the flexi/multi cap segment for the right reasons like building a comprehensive portfolio or achieving your investment objective; getting invested simply because 'others are doing so' certainly doesn't qualify as a good enough reason.
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