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Mumbai, 26 August 2025:
The Rise of Passively Managed Flexicap Funds in India
In an evolving landscape for mutual funds in India, the introduction of passively managed flexicap funds is generating significant interest. Traditionally dominated by actively managed funds, the flexicap category is now welcoming innovative investment strategies aimed at balancing risk and returns. The DSP Mutual Fund (DSP MF) has introduced a groundbreaking product, the Nifty 500 Flexicap Quality 30 Index Fund, which stands out as the first rule-based, passively managed fund in a category valued at ₹4.93 trillion.
What is a Flexicap Fund?
A flexicap fund represents an investment vehicle that allows for dynamic allocation across large-cap, mid-cap, and small-cap stocks, depending on market conditions. Typically, actively managed flexicap funds allocate a considerable portion of their assets to large-cap stocks, with allocations ranging from 62% to 84% in recent data. For instance, as of 31 July 2025, the Parag Parikh Flexicap Fund had a 62% allocation to large-caps, while HDFC Flexicap held an 84% allocation. These funds primarily focus on large-cap stocks despite the flexibility they have to invest in smaller companies.
In contrast, DSP MF’s new offering aims to effectively bridge this gap by employing a strategy that enables it to vary its allocations more significantly between mid- and small-cap stocks based on performance metrics. According to Anil Ghelani, head of passive investments at DSP MF, “Pure momentum can at times lead to stocks with relatively lower quality. Hence, the quality filter helps to avoid such companies.”
How Does the New Fund Operate?
The Nifty 500 Flexicap Quality 30 Index Fund utilizes a unique strategy, allowing allocations to mid- and small-cap stocks to vary between 33% and 67% based on observed market momentum. When mid- and small-caps are performing stronger than their large-cap counterparts, the fund adjusts to reflect that trend. Conversely, as soon as this momentum shifts, the fund can reduce its small-cap exposure and realign towards large-cap stocks.
This dual-focus strategy, combining momentum with a quality filter, emphasizes risk mitigation while seeking long-term growth. Notably, the fund has back-tested data that indicates it can achieve promising results over extended periods. For example, historical data shows the Nifty 500 Flexicap Quality 30 Total Return Index has delivered an average rolling return of nearly 19% over three- and five-year periods, outperforming broader indices like the Nifty 500.
Investment Strategies and Recommendations
Financial experts increasingly suggest that potential investors consider Systematic Investment Plans (SIPs) as a preferred strategy for investing in this fund. With markets being inherently cyclical, SIPs provide a way for investors to gradually build their portfolio and benefit from rupee-cost averaging. As Ghelani states, “Through SIPs, investors can ride the market cycle and also take advantage of rupee-cost averaging.”
However, potential investors should also heed the pitfalls of a passively managed fund. As Ravi Kumar TV, founder of Gaining Ground Investment Services, mentions, “It will be a concentrated fund, which can lead to higher volatility in certain phases of markets.” Since the fund adheres to a rule-based approach, there is a risk it may lag in responsiveness during sudden market fluctuations, unable to swiftly adjust its allocations until the next scheduled rebalance.
Should You Consider This New Fund?
While actively managed flexicap funds have shown a tendency to lean heavily towards large-cap stocks, plenty of other options within the flexicap space continue to deliver solid returns. The passive fund’s use of a quality filter helps mitigate downside during market declines while leveraging momentum strategies can capitalize on mid- and small-cap rallies. Furthermore, a lower expense ratio (0.3%) compared to traditional actively managed funds (ranging from 0.43% to 1.35%) adds to its attractiveness.
Despite these advantages, investors are advised to remain cautious. This fund represents a novel concept in the Indian market, and financial advisors often recommend waiting to see how it performs over the coming years before fully committing to it in an investment portfolio.
In conclusion, the DSP Nifty 500 Flexicap Quality 30 Index Fund offers both opportunities and challenges. While it fills a unique niche in the mutual fund landscape, investors should carefully consider their risk tolerance and investment strategy when deciding whether to participate.
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Original source: www.livemint.com
