Have you ever been caught in a raging downpour without an umbrella? That is precisely how you will feel if you invest in just one type of mutual fund and the market undergoes a prolonged correction. Diversification within the same asset class or across different categories is a time-tested idea in modern finance, be it mutual funds, stocks, or any other financial asset.
To be sure, only about 8% of Indians invest in mutual funds in India. The number is low compared to developed nations such as the US, where 46% of the population invests in mutual funds. One of the reasons behind low mutual fund investment penetration in India is the lack of awareness and understanding among Indian investors about various fund categories and their associated risks.
Two popular mutual fund categories are flexi-cap and multi-cap funds. Understanding what multi-cap and flexi-cap funds are is important before we get into the flexi-cap vs. multi-cap debate. Read on to learn more about multi-cap and flexi-cap funds to decide on the fund best suited for you.
What is a Multi-Cap Fund?
Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), the Indian markets regulator. The scheme types and the framework to be followed by each scheme are also laid down by SEBI. All mutual fund scheme types can be found on the Association of Mutual Funds in India (AMFI) website.
According to the AMFI classification, multi-cap funds are equity mutual funds that invest in listed entities across market capitalizations, including large-cap, mid-cap, and small-cap stocks.
Multi-cap funds follow a diversified investment approach, providing balanced exposure to different company stock categories and varying risk-return profiles in a single fund.
As per SEBI regulations, multi-cap funds must invest at least 75% of their total assets under management in equities and equity-oriented investments, with at least 25% in large-cap stocks, 25% in mid-cap stocks, and 25% in small-cap stocks.
All multi-cap funds have to follow the above-mentioned asset allocation. The structure is aimed at providing diversification across market caps. The fund will also provide a relatively balanced risk-return profile as large-cap stocks will bring stability.
A multi-cap fund eliminates investors’ need to invest in multiple mutual funds targeting different market caps. Additionally, fund managers make strategic assets based on prevailing market conditions, making these funds suitable for investors with varying risk appetites and investment horizons.
Key Features of Multi-Cap Funds
Here are the key features of a multi-cap mutual fund:
- Diverse Portfolio Composition
Multi-cap funds invest in companies across market capitalization, providing a balanced exposure to companies of all sizes and belonging to different sectors. Diversification helps capitalize on growth opportunities offered by mid- and small-cap companies, while large-cap companies provide stability to the fund.
- Active Management
Unlike index funds that mimic an index, multi-cap funds are actively managed funds where the fund managers proactively change the fund’s investment style and portfolio based on market trends. In other words, multi-cap fund managers can adjust the allocation among large, mid-, and small-cap stocks as per their market outlook. Alternatively, the fund manager can also invest up to 25% in debt securities in volatile markets.
- Risk Mitigation
Investments in multi-cap funds are spread across market caps. This allows multi-cap funds to effectively manage risk as large-caps offer stability while mid- and small-cap funds offer growth potential.
Investment Horizon and Strategy
While relatively stable vis-a-vis a small-cap mutual fund, a multi-cap fund is still an equity mutual fund and comes with underlying risks associated with equity mutual fund investments.
Investors with medium to long-term investment horizons can invest in a multi-cap mutual fund. Investment experts suggest a time horizon above five years for multi-cap investment. The long-term investment horizon allows these funds to ride out market fluctuations and benefit from compounding returns over time.
What is a Flexi-Cap Fund?
Flexi-cap funds are a separate category of equity mutual funds that are designed to provide greater flexibility than multi-cap funds.
A flexi-cap fund is mandated to invest a minimum of 65% of its AUM in equities. It can invest this in registered companies with varying market capitalizations without fixed allocation requirements.
Fund managers can dynamically adjust their portfolios based on prevailing market conditions and opportunities to make the most of the market momentum.
Key Features of Flexi-Cap Funds
Here are the key features of a flexi cap fund:
- Unrestricted Investment
Flexi-cap funds do not follow market capitalization-specific investment allocation mandates. This allows fund managers to concentrate investments in large-caps or small-caps based on their market reading and analysis.
- Higher Allocation to Large-Caps
Flexi-cap funds typically allocate a significant chunk of their AUM to large-cap companies. This asset allocation makes flexi-cap funds less volatile than multi-cap funds, especially during a bear market.
- Long-Term Flexibility
Flexi-cap funds are designed to be agile and adapt to the changing market conditions. Fund managers can shift allocation in response to the changing market trends. This can prove to be beneficial to investors in the long run.
Investment Strategy
Investors with a long-term investment horizon of 3+ years looking for a versatile approach to investment can opt for a flexi-cap fund.
The lack of a fixed allocation mandate allows for a tailored approach to investment that can align with the evolving market conditions. But investors should remember that this is also an equity mutual fund scheme and thus comes with the risks attached to equity investments.
Multi-Cap Funds vs. Flexi-Cap Funds
Here is a comparative overview of flexi-cap funds vs. multi-cap funds:
| Feature | Multi-Cap Funds | Flexi-Cap Funds |
| Investment Range | Must invest at least 25% in large, mid-, and small caps each | No fixed allocation; can focus on any market cap |
| Minimum Equity Allocation | Minimum 75% to be invested in equities | Minimum 65% to be invested in equities |
| Management Flexibility | Limited freedom; must maintain balance across caps | High flexibility; can shift focus based on conditions |
| Risk Profile | Higher risk due to exposure to small/mid-caps | Lower risk due to the ability to shift allocation to large caps during market volatility |
| Investment Horizon | Recommended for long-term (5+ years) | Suitable for long-term (3+ years) |
Flexi-Cap vs Multi-Cap: Which one should you choose?
Multi-cap and flexi-cap funds offer unique asset allocation and risk-return profiles.
Multi-cap funds provide a structured approach with mandatory diversification across different market caps. Flexi-cap funds offer greater flexibility for fund managers to adapt to changing market conditions.
Multi-cap fund, which has a fixed allocation to both mid- and small-cap stocks, might be more suitable for individuals who have a higher risk appetite and a longer investment horizon.
Flexi-cap fund would appeal to moderate risk-takers who want to benefit from higher equity returns, but also want a relatively stable investment option that can alter the investment approach when the markets become volatile. Flexi-cap fund might also work for investors with a medium-term investment horizon of 3 years or more.
Ultimately, the choice between multi-cap and flexi-cap funds should align with individual investment objectives, risk appetite, and time horizon. Understanding these differences will empower investors to make informed decisions that suit their financial needs.
