Small-cap and mid-cap mutual funds have been long-time favourites among investors seeking aggressive growth. But FY25 has shifted the narrative. A correction phase, heightened valuations, and low returns have prompted investors to look elsewhere.
The trend is increasingly tilting towards focused and large-cap oriented funds. And the shift isn’t emotional; it’s rational, data-backed, and fast-gaining momentum.
Understanding Focused and Flexi-Cap Funds
Focused funds are equity mutual funds that invest in a concentrated portfolio of typically 20 to 30 stocks. These are handpicked based on high conviction, usually across sectors and market caps.
Fund managers apply bottom-up stock selection to build a tight portfolio that avoids over-diversification. The objective is to generate risk-adjusted returns by relying on the fund manager’s skills. However, this concentrated strategy also means higher exposure to stock-specific volatility.
On the other hand, flexi-cap funds offer more versatility. These funds can allocate dynamically across large-cap, mid-cap, and small-cap stocks based on market conditions, sector trends, and valuations.
Unlike large-cap or small-cap funds that stick to a fixed ratio to a certain market cap, flexi-cap funds allow fund managers to shift allocations depending on where the opportunity lies. This gives them the ability to weather market corrections better and capitalize on growth cycles across segments.
Together, focused and flexi-cap funds offer a blend of conviction and flexibility.
Why Is Investor Sentiment Shifting in FY25?
The surge in focused and flexi-cap funds isn’t random. Investors are choosing high-conviction, actively managed portfolios that limit over-diversification.
Investor sentiment took a cautious turn by Q4 FY25, with sharp corrections in small and mid-cap segments. Over 95% of small-cap mutual fund SIPs posted negative one-year returns, pushing many investors to exit or pause SIPs.
In contrast, focused funds were the only category with positive inflow, attracting ₹1,288 crore in February, at a 60% rise, while flexi-cap funds continued to benefit from their allocation flexibility. The growing appeal lies in their ability to offer portfolio resilience, avoid overexposure, and focus on high-quality stocks amid market uncertainty.
Why Should Investors Consider Focused + Flexible Funds?
In a market shaped by valuation extremes and global uncertainty, focused and flexi-cap funds offer structural advantages. Here’s why they’re emerging as the preferred choices for informed investors in FY25–26.
Better Risk Management Without Compromising Growth
Focused funds such as SBI Focused Equity Fund hold a compact basket of 20-30 stocks. Flexi-cap funds, meanwhile, have the leeway to shift between large, mid, and small caps based on risk-reward dynamics. This combination creates a responsive framework, preserving capital during market downturns while still capturing upside.
High-Quality Exposure With Lower Overlap
Focused funds often follow a portfolio management-style selection strategy by holding well-researched compounders like HDFC Bank, ICICI Bank, or Titan. This ensures quality exposure and often leads to less portfolio overlap than diversified multi-cap funds. It avoids duplication across multiple schemes and enhances capital efficiency.
Stability During Policy Shifts and Rate Cycles
India’s monetary policy environment remains sensitive to inflation and global rate adjustments. Focused and flexi-cap funds offer more stability during such cycles due to their selective nature and large-cap tilt.
Conclusion
Both focused and flexible funds offer a combination of strategic investments and flexibility to move across different market caps based on market conditions. The right mix is not about chasing returns; it’s about navigating markets with balance. Focused + flexible funds based on your goals and risk appetite can lead to consistent returns over time.
