UTI Flexi Cap Fund – A flexi-cap portfolio with emphasis on business sustainability Creating wealth since 1992

Setting a realistic financial goal is the first-step towards successful investing for any investor. While looking for an investment option which can consistently reward you is important, it is equally important to understand the risk associated with it to aim for an optimal outcome in the long-term. Mutual fund options can be explored for meeting financial goals ranging from short-term to long-term, while choosing to invest from wide-range of products across the asset class. Here is one mutual fund product category that investors can look for investing in meeting long-term wealth creation goals.

Flexi-cap funds are open-ended equity funds investing at least 65% of total assets are invested in equity assets of companies across the different market capitalizations viz., large-cap, mid-cap or small-cap fund. UTI Flexi Cap Fund is one of the oldest funds in the category (launched in 1992) and has a long-term track record of consistent performance. The Fund has a corpus of over Rs. 27,700 crores (as on September 30, 2024). This offering from UTI Mutual Fund is suitable for any long-term investor looking for a fund that endeavors to invest in quality businesses having potential for creating economic value for investors.

UTI Flexi Cap Fund’s investment philosophy is built around the three pillars of Quality, Growth and Valuation. The portfolio strategy would be to focus on businesses that have the ability to show strong growth for a long period of time and are run by seasoned management.

“Quality” signifies the ability of a business to sustain a high Return on Capital Employed (RoCE) or Return on Equity (RoE) over a long period of time. Truly high quality businesses are those that are able to generate high RoCEs and also RoEs even during difficult times for their respective industries or sectors and therefore operate above their cost of capital at all times. More often than not, a business with a high RoCE/ RoE shall be able to generate strong cash-flows and these strong cash flows become the source of economic value creation.

“Growth” on the other hand signifies long term secular growth for the business. The fund emphasizes on businesses that have steady and predictable growth trajectory rather than cyclical and volatile growth. Cyclical growth or de-growth can be very sharp and unpredictable and can surprise investors in either directions, as against secular growth where there is relatively more certainty in understanding the long term drivers and hence future outcomes. While high quality businesses create economic value, a high growth business enables compounding of this economic value. It is for this reason that the fund’s favorite hunting ground for stock selection is the intersection of quality and growth.

The last pillar of the fund’s investment philosophy is “Valuations”. Valuations are an important metric as an entry point into a great business and therefore one should very carefully study this before entering a stock. Although a Price to Earnings (P/E) multiple is a good starting point for understanding the valuations of a business, it is also a widely misunderstood valuation technique. The P/E is merely a shorthand metric for the firm’s cash flow generation and value creation potential over a long period. More often than not, a high RoCE and high growth business creates more value over the long-term and would hence mathematically deserve a higher P/E. It would still be an attractive investment for long term investors who invest on the basis of business fundamentals rather than on the basis of what would outperform in the next few months or quarters. Therefore, before reaching a judgement by looking solely at P/Es, one has to carefully study the characteristics of each business and then establish the fair valuation band for each of them. The P/E hides more than it reveals and must always be considered in the context of RoCE, opportunity to reinvest in the business and free cash flow.

The Fund invests across the market capitalization spectrum following the “Growth” style of investment. The scheme’s top ten holding consists of ICICI Bank Ltd., HDFC Bank Ltd., Bajaj Finance Ltd., LTIMindtree Ltd., Avenue Supermarts Ltd., Infosys Ltd., Zomato Ltd., Info-Edge (India) Ltd., Kotak Mahindra Bank Ltd., And Trent Ltd., which account for around 42% of the portfolio’s corpus as of September 30, 2024.

UTI Flexi Cap Fund is suitable for those equity investors looking to build their “core” equity portfolio and seeking long term capital growth through investment in quality businesses that generate economic value. Investors with moderate risk-profile and looking to invest for at least 5 to 7 years to meet a long-term financial goal, may consider investing in this fund.