Whalesbook
A Strategic Split Emerges
Flexicap funds, which can invest across all market sizes, are showing contrasting outlooks. As of March 2026, 22 out of 39 funds increased their exposure to large-cap stocks, favoring stability. The remaining 17 funds, however, boosted their holdings in mid- and small-cap (SMID) stocks, aiming for higher growth. This split creates different performance paths for these funds, with some prioritizing safety and others seeking higher returns from smaller, more volatile companies. The benchmark Nifty 500 index fell about 11% in March 2026 due to geopolitical tensions, highlighting varied responses to market shocks.
Manager Choices: From Sector Leaders to Valuation Calls
Managers say these differing strategies come from picking specific stocks and sector opportunities, not just a general market-cap decision. Harish Krishnan, Chief Investment Officer – Equity at Aditya Birla Sun Life AMC, notes leading companies in IT services, insurance, and banking are often found in the mid- and small-cap areas, making them more attractive as market hype fades. This view suggests focusing on fundamental growth drivers, regardless of company size. Sachin Relekar, Senior Fund Manager at Axis MF, explains his fund's allocation is based on stock fundamentals, reducing high-risk companies and increasing investment in those with attractive valuations. Samco MF increased large-cap exposure by nearly 25% over the past year because their momentum strategy favored large caps' stronger performance then. Valuations also matter: the Nifty 50's forward P/E was around 20.14 in March 2026, a fair valuation. Large caps traded below their 3-year average P/E, and mid/small caps also traded below historical averages, showing opportunities across segments.
How Funds Compare: Allocations and Past Performance
Funds from Samco, 360 One, and Motilal Oswal led the increase in large-cap holdings. However, even after this rise, their large-cap allocations stayed at or below 60% as of March 2026. This contrasts with larger funds like HDFC Flexicap Fund, which kept a significant 78% in large caps, and the Nifty 500 benchmark, which has over 60% in large caps. Historically, flexicap funds have shown adaptability. In the year ending October 2025, many larger flexi-cap funds performed better than the Nifty 500 TRI by adjusting their investments, like adding large caps during uncertain times or increasing mid-caps after market drops. The current split may be a similar response, with some managers choosing defensive large caps amidst geopolitical risks, while others take advantage of perceived SMID opportunities. Mid-caps provided positive returns in FY26, while large and small caps saw declines.
Risks for Both Strategies
Despite their flexibility, flexicap funds face risks with these differing strategies. Funds increasing large-cap holdings risk missing out on higher growth from SMID segments if the economy speeds up. Conversely, funds heavily invested in mid- and small-caps face greater volatility. In March 2026, the Nifty Smallcap 100 index dropped about 22% from its peak, showing the risks in smaller, less liquid stocks. Geopolitical tensions, especially concerning the Middle East and oil supplies, could increase inflation, widen India's current account deficit, and pressure government finances, potentially harming growth-focused portfolios more. Also, while flexicaps offer diversification, their success heavily relies on fund manager skill. A weak process can lead to unpredictable results, especially in uncertain markets. New SEBI rules starting April 1, 2026, will create a more regulated environment for Asset Management Companies (AMCs), possibly affecting fees and compliance.
Outlook: Investor Interest and Economic Tailwinds
The flexicap category is expected to remain popular with investors due to its adaptability in uncertain markets. Equity mutual funds, including flexicaps, saw strong inflows in March 2026, with flexi-cap funds attracting significant retail investor interest. Analysts expect these inflows to continue, supported by India's strong economy, steady GDP growth, and reliable corporate earnings, even with global challenges. The ongoing demand for flexibility means funds that can effectively manage the large-cap versus SMID allocation debate and navigate risks from geopolitics and valuations are likely to attract investor attention. India's overall economic growth outlook is positive, providing a good environment for equity markets and flexible fund strategies.