Mutual funds have become a popular investment choice in India, offering attractive returns and a strong defence against inflation. They are essential tools for achieving long-term financial goals, making it crucial to understand effective investment strategies for building a portfolio aligned with your aspirations.
Among equity mutual funds, multi cap and flexi cap funds allow you to diversify your investment across different market capitalisations, making them ideal for the long-term. But what sets them apart? This blog explores the key differences between multi-cap vs flexi cap funds to help you make informed investment decisions.
What Are Multi-Cap Funds?
Multi-Cap funds are equity mutual funds that invest in a diverse portfolio of stocks across various market capitalisations, including large-cap, mid-cap, and small-cap companies. This strategy allows fund managers to capitalise on opportunities throughout the market, providing flexibility that single-cap funds lack.
According to SEBI’s regulations, these funds must invest at least 25% of their total assets in each category of market capitalisation, i.e., large-cap, small-cap and mid-cap. This provides sufficient diversification for investors while ensuring that fund managers have the freedom to explore opportunities across the market spectrum.
This adaptability makes them a robust choice for wealth creation, as they can capitalise on lucrative opportunities in any market segment. Additionally, investors can find multi-cap schemes tailored to their financial goals and risk tolerance.
What Are the Advantages of Multi Cap Funds?
Multi-cap funds offer a range of benefits that make them a popular choice among investors looking for a balanced and flexible investment approach. Here are the key advantages:
- Diversification: Invest across large-cap, mid-cap, and small-cap companies, reducing risk through varied sector exposure.
- Broad Market Coverage: Gain exposure to key sectors and industries driving India’s growth, without market-cap restrictions.
- Flexibility: Adjust portfolio allocations based on market conditions, balancing stability and growth opportunities.
What Are the Disadvantages of Multi Cap Funds?
While multi-cap funds provide diversification and adaptability, they also come with certain limitations and risks. Here are the potential drawbacks to consider:
- Higher Risk: Exposure to volatile mid-cap and small-cap stocks increases risk.
- Diluted Returns: Returns may be impacted if underperforming segments weigh down overall performance.
What are Flexi-Cap Funds?
Flexi-cap funds are equity mutual funds that offer the flexibility to invest in companies across various market capitalisations such as large-cap, mid-cap, and small-cap—without restrictions. Unlike multi-cap funds, they don’t have any restrictions on asset allocations provided they invest at least 65% of their total assets in equities.
Flexi-cap funds enable fund managers to allocate investments across market caps dynamically. This flexibility allows them to capitalise on market opportunities, manage risks effectively,
What Are the Advantages of Flexi-Cap Funds?
Flexi-Cap funds offer several benefits, making them an attractive choice for investors seeking a balanced and adaptive approach to equity investments:
- Enhanced Diversification: These funds invest across different market caps and sectors, providing a well-diversified portfolio that helps reduce risk.
- Effective Risk Management: By balancing small-cap volatility with large-cap stability, Flexi-Cap Funds offer protection against market fluctuations.
- Adaptability to Market Cycles: Flexi-Cap Funds can adjust their allocations based on market conditions, making them resilient in both bullish and bearish phases.
What Are the Disadvantages of Flexi-Cap Funds?
While flexi-cap funds offer versatility and diversification, they come with certain challenges:
- Fund Manager Bias: The discretion given to fund managers may lead to biased decisions that could impact returns.
- Increased Expenses and Turnover: Frequent portfolio rebalancing can lead to higher transaction costs and tax implications.
Multi-Cap vs. Flexi-Cap Funds: What Are the Key Differences?
Both multi-cap and flexi-cap Funds are equity funds that diversify investments across various market capitalisations, but they differ in several key aspects. Here is a breakdown of the differences between multi-cap and flexi-cap funds:
| Particulars | Multi-Cap Funds | Flexi-Cap Funds |
| Meaning | Multi-cap funds invest in a mix of large-cap, mid-cap, and small-cap companies, with a set mandate to maintain diversification. | Flexi-cap Funds are dynamic and can invest in companies of any market capitalisation, offering more flexibility. |
| Equity Exposure | At least 75% of the fund’s assets must be invested in equities and equity-related instruments. | A minimum of 65% of the fund’s assets must be allocated to equities and equity-linked instruments. |
| Market Cap Allocation | Requires a minimum 25% allocation to each market cap—large, mid, and small-cap—as per SEBI regulations. | No specific allocation mandate, allowing the fund to invest freely across market caps without restrictions. |
| Fund Manager Discretion | Fund managers have the flexibility to choose stocks within the specified market cap range. | These managers have complete discretion to select stocks from any market cap, based on growth potential. |
| Risk | Multi-cap funds have higher risk than large-cap funds due to exposure to mid and small-cap stocks, which are more volatile. | Flexi-Cap funds also have higher risk than large-cap funds but the risk varies based on the asset allocation chosen by the fund manager. |
How to Choose Between Flexi-Cap Funds vs. Multi-Cap?
When deciding between flexi-cap vs multi-cap funds, consider the following factors to determine which aligns with your financial goals and risk profile:
- Investment Goals and Risk Tolerance: Multi-cap funds offer balanced diversification for conservative investors. Flexi-Cap funds are better for those seeking higher returns and willing to accept more risk.
- Investment Horizon: Both funds perform well over the long term, but flexi-cap funds may fare better during volatile periods due to their flexibility.
- Market Conditions and Economic Outlook: Flexi-cap funds offer better adaptability in uncertain markets, while multi-cap funds provide stability with structured and diversified allocations.
- Fund Management and Track Record: The success of flexi-cap funds depends on the fund manager’s expertise in adjusting allocations. Both funds benefit from skilled management, but flexi-cap funds are more reliant.
- Expense Ratios and Fees: Compare expense ratios to maximise returns. Lower fees can significantly impact long-term growth.
- Tax Implications: STCG (short-term capital gains) is taxed at 20%, and LTCG (long-term capital gains) over ₹1.25 lakh is taxed at 12.5%. Long-term gains up to ₹1.25 lakh are tax-exempt.
Who Should Invest in Multi Cap Funds?
Here are all the individuals who should invest in multi-cup funds:
- First-Time Investors: Multi-cap funds are ideal for beginners due to their diversified nature, which helps manage risk. They offer exposure to large, mid, and small-cap stocks, making them a safer choice for those new to equity investing.
- Investors Uncertain about Market Caps: For those unsure whether to invest in stable large-cap companies or high-growth, riskier small and mid-cap stocks, multi-cap funds offer a balanced solution, providing exposure to both without requiring a decision between them.
- Long-Term Investors: With a long-term investment horizon (5+ years), multi-cap funds can help achieve financial goals like retirement, children’s education, or buying a home. The longer horizon buffers against market volatility, allowing for the benefits of compounding.
- Investors Seeking Growth with Lower Risk: For those who want to tap into the growth potential of mid and small-cap stocks but are cautious of the volatility, multi-cap funds provide a balanced exposure, reducing the risks while capturing growth opportunities.
Who Should Invest in Flexi Cap Funds?
Flexi-cap funds are best suited for:
- Moderate to High-Risk Tolerance Investors: Those comfortable with some market fluctuations and looking for the potential of higher returns through diversified equity exposure.
- Long-Term Investors (5+ years): Flexi-cap Funds are ideal for individuals with a long-term outlook, who are looking for a flexible portfolio that adjusts to changing market conditions.
- Diversification across Market Capitalisations: These funds offer flexibility to invest across large, mid, and small-cap stocks, making them suitable for investors who want to balance growth and stability within their portfolio.
Flexi Cap vs Multi Cap Funds: Which is Better?
Choosing between multi-cap vs flexi cap Funds depends on your investment goals, risk tolerance, and time horizon. Consider the following factors before making a decision:
-
Risk Appetite
If you are willing to take on higher risk for the potential of higher returns and trust the fund manager’s expertise, flexi-cap funds may be suitable. Multi-cap funds offer a diversified approach with a more balanced risk profile for those seeking lower risk and more stable returns.
-
Time Horizon
For investors with a longer time horizon (5+ years) who can endure market volatility, flexi-cap funds may provide higher growth potential. However, if you have a shorter time horizon and want to mitigate volatility, Multi-Cap Funds may offer a safer, more stable option.
-
Personal Preference
If you have a particular view on the market cap segments and want to tailor your portfolio accordingly, flexi-cap funds give fund managers the freedom to allocate more in segments with high future potential. If you prefer a diversified, balanced portfolio without any market cap bias, multi-cap funds could be the better choice for you.
Ultimately, the decision between flexi-cap and multi-cap funds hinges on your investment style, goals, and risk tolerance.
Final Thoughts
In this blog, we have explored the key differences between multi-cap vs flexi-cap funds to help you understand their unique features. We hope the information provided clarifies both options for you.
Please note, this blog is intended for educational purposes only. While both funds offer portfolio diversification, it is important to choose the one that aligns with your financial goals, risk tolerance, and investment horizon.
Frequently Asked Questions
-
Is a flexi-cap fund good for the long term?
Yes, flexi-cap funds are well-suited for long-term investment. Their flexibility allows fund managers to adjust the portfolio based on market conditions, providing the potential for consistent growth over time.
-
Which multicap funds are top-rated?
Some of the top-rated multi-cap funds include:
- Nippon India Multi Cap Fund
- Kotak Multicap Fund
- HDFC Multi Cap Fund
- ICICI Prudential Multicap Fund
These funds are known for their strong performance and diversified portfolios.
-
How can I decide which fund type is right for me?
To choose the right mutual fund, follow these steps:
- Define your investment goals (e.g., retirement, education, wealth creation).
- Select a fund category (equity, debt, hybrid) based on your risk tolerance.
- Evaluate factors like historical returns, expense ratios, and the fund manager’s expertise.
-
Which fund type typically has lower expense ratios?
Direct mutual funds usually have lower expense ratios, which can result in higher returns over time. However, they require investors to make their own investment decisions, as they do not offer intermediary advice.
-
Do flexi cap funds come with a lock-in period?
No, flexi-cap funds do not have a lock-in period. Investors can freely enter or exit the fund at any time, offering greater flexibility.
