Should you shift investment to conservative hybrid mutual fund and then start an STP to flexi-cap scheme?

 

Making the right investment decisions to achieve your financial goals often requires balancing the twin objectives of capital protection and appreciation. While conservative funds focus on preserving capital, flexi-cap funds aim for higher returns over the long run. This article discusses whether shifting investments from hybrid mutual fund investments to flexi-cap funds using the Systematic Transfer Plan approach makes sense for Indian investors. It also details factors to consider for asset allocation and STP plan structuring. 

Risk appetite

Before making any changes to your mutual fund portfolio, the first step is to carefully assess your own risk appetite and investment goals. Conservative hybrid funds and flexi-cap funds differ significantly in their risk-return profiles. 

Conservative hybrid funds aim to provide stable returns with relatively lower risk by investing in both debt and equity components. Typically, they maintain a higher allocation to debt instruments like government securities, corporate bonds, etc. Their equity exposure is limited to large-cap stocks which are considered less volatile than mid and small-caps. 

On the other hand, flexi-cap funds have the flexibility to invest across the entire market cap spectrum - large, mid, and small-caps. This allows them to capitalize on opportunities across the market. However, their returns can fluctuate more compared to conservative hybrid funds as small and mid-cap stocks tend to be high risk-high return in nature. 

So you need to understand if your priorities are more towards capital preservation with moderate returns or higher capital appreciation over the long run even if it comes with increased volatility in the shorter term. Your investment horizon, ongoing liabilities and risk tolerance level should guide this decision. 

Opportunity in the Indian market

The Indian stock market has shown strong growth over the past decade despite pandemic-led volatility. Various reforms and policy initiatives are helping India emerge as one of the fastest growing major economies in the world. This offers attractive long-term investment opportunities, especially for flexi-cap funds to participate across market caps. 

Mid and small-caps have massively outperformed large-caps in the past. Flexi-cap funds have the flexibility to shift allocations dynamically as market conditions change and exploit growth opportunities early. However, short-term corrections cannot be ruled out as economic recovery remains uneven. 

That's where starting an STP from a conservative hybrid fund into a flexi-cap fund makes sense - it averages out your purchase cost over a period of time, thereby reducing risks of market timing. STP helps you benefit from upside potential of flexi-cap while staying invested through volatile periods. 

Factors to consider for an STP

When planning an STP, some factors you need to evaluate carefully include - STP amount and frequency, duration of an STP, and choice of flexi-cap fund. 

Larger STP amounts invested frequently for longer durations will enable quicker transition to flexi-cap with more opportunities to benefit from market fluctuations. Monthly or quarterly STPs of 1-3 years are generally considered adequate. 

It's also important to evaluate the past performance and processes of different flexi-cap funds to identify one with a consistent track record of outperforming its peers over long periods of market cycles. The fund's investment strategy and portfolio concentration should align with your risk tolerance. 

Conclusion

Shifting investments from conservative hybrid funds to flexi-cap funds through SIP makes sense for investors with a 3–5-year horizon who want to participate in India's growth story across market caps. By staggering investment via an STP, downside risks are reduced compared to lump sum investing in a flexi-cap scheme. However, personal financial goals, liability profile and risk appetite should drive the final decision. Regular reviews are also advisable to ensure the asset allocation remains aligned with the investor's evolving needs and market conditions.