A study of 13 flexi-cap mutual funds shows that long tenure does not always guarantee the best wealth creation. While early investments of Rs 1 lakh grew to as much as Rs 1.98 crore in some schemes, outcomes varied widely. Investors should look beyond just how long a fund has existed and focus on consistent compounding performance across different market cycles.
Investing in equity markets over several decades remains a reliable way to build wealth in India. Recent analysis of 13 flexi-cap mutual funds, some with over 15 years of history, shows that simply staying invested for a long time is not the only key to success. The actual compounding rate, or the internal rate of return, is what drives the final corpus size. While funds launched in the mid-1990s have had more time to grow, their total returns have not always beaten younger schemes that managed to achieve higher consistent growth.
Wealth Generation and Performance Disparities
The difference in outcomes can be stark. For instance, a Rs 1 lakh lump-sum investment in the HDFC Flexi Cap Fund since its inception would have grown to approximately Rs 1.98 crore. In comparison, the same Rs 1 lakh invested in the Aditya Birla Sun Life Flexi Cap Fund or the Franklin India Flexi Cap Fund would have resulted in roughly Rs 1.89 crore and Rs 1.52 crore, respectively. The Taurus Flexi Cap Fund, launched in 1994, shows that even older funds may deliver lower absolute returns compared to newer schemes if they do not maintain strong growth rates over the long term. These examples highlight the importance of choosing a fund that maintains consistent alpha, which is the extra return generated above the benchmark, rather than relying solely on the date of the fund's launch.
Flexibility as an Investment Advantage
Flexi-cap funds are popular because they can change their allocation between large, mid, and small-cap stocks. SEBI, the market regulator, mandates that these funds must invest at least 65% of their assets in equities. The freedom to move money across different market sizes allows fund managers to shift to companies that they believe will perform best. However, this flexibility is also a risk. If a manager gets the allocation wrong, or if mid and small-cap stocks go through a period of low demand, the fund's performance can drop compared to larger, more stable funds.
SIP Strategy and Market Cycles
Systematic Investment Plans (SIPs) help investors manage the ups and downs of the market. By investing a fixed amount every month, investors buy fewer units when prices are high and more units when prices are low. This helps in averaging the cost of investment. For example, the HDFC Flexi Cap Fund has shown a SIP XIRR, or the annualized internal rate of return, of over 20%. This often differs from a lump-sum growth rate because the money is added in parts during different market regimes. Investors often see that consistent monthly contributions can turn into significant capital over time, sometimes reaching over Rs 20 crore in total value for the fund.
What Investors Should Monitor
When evaluating these funds, investors should consider several factors beyond historical returns. The expense ratio, which is the annual fee charged by the fund, can impact long-term returns. Frequent changes in the fund management team can also affect strategy. Since these funds operate across various market caps, investors should track whether the fund’s risk level aligns with their own. Future performance will depend on the manager's ability to pick the right stocks in changing economic conditions and the ability of the fund to handle volatility during market downturns.