Flexi Cap vs Multi Cap Funds

Multi-cap mutual funds must allocate at least 25 percent of their Assets Under Management (AUM). Multi-cap funds invest 25% each in large, mid, and small-cap stocks, with 25% flexible. Flexi-cap funds have no such restrictions across stock categories.
EXPLORE FUNDS
Difference Between Flexi Cap and Multi Cap Funds
EXPLORE FUNDS
4 mins read
20-August-2024

Flexi-cap funds grant fund managers unrestricted freedom to select stocks across all market capitalisations. In contrast, multi-cap funds are mandated to invest in a blend of large-cap, mid-cap, and small-cap stocks, with at least 25% allocated to each category. The remaining 25% can be invested in other assets like debt instruments or kept in cash. This structure renders multi-cap funds riskier compared to those primarily focusing on large-cap stocks. Flexi-cap funds provide greater versatility in portfolio composition. However, several other distinctions exist between them, prompting consideration of which aligns better with your investment objectives.

What are flexi-cap funds?

Flexicap funds are equity funds that have the flexibility to invest in any market cap segment, i.e., large-cap, mid-cap, or small-cap stocks, without any restriction. This means that the fund manager can change the allocation of the fund based on the market conditions, opportunities, and valuations. For example, the fund manager can increase the exposure to large-cap stocks when the market is volatile or uncertain, or shift to mid-cap and small-cap stocks when the market is bullish or offers attractive growth prospects. Flexicap funds have to invest at least 65% of their total assets in equity and equity-related instruments, as per the Securities and Exchange Board of India (SEBI) norms. Read more about, What are flexi cap mutual funds.

What are multi-cap funds?

Multicap funds are equity funds that invest in a diversified portfolio of large-cap, mid-cap, and small-cap stocks, as the name implies. However, unlike flexicap funds, multicap funds have to follow a specific allocation rule, as per the SEBI guidelines. Multicap funds have to invest at least 25% of their total assets in each of the three market cap segments, i.e., large-cap, mid-cap, and small-cap stocks. This means that the fund manager has to maintain a balanced exposure to all the segments, regardless of the market situation or outlook. Multicap funds also have to invest at least 75% of their total assets in equity and equity-related instruments. Read more about, What are multi-cap funds.

Major differences between multi-cap funds and flexi-cap funds

Flexicap funds typically exhibit lower volatility, particularly during market downturns or dips, because they contain a greater proportion of large-cap equities. However, multicap funds are typically more volatile than small and mid-cap funds due to their greater exposure to the latter group, especially during market downturns. Examine the following distinctions between flexi cap and multi cap funds:

Criteria

Flexi-Cap Funds

Multi-Cap Funds

Meaning

Dynamic allocation across market caps based on market conditions and fund manager discretion.

Invest across market caps without a fixed allocation, often managed actively.

Equity Exposure

Primarily equity-oriented with varying allocations to large, mid, and small-cap stocks.

Predominantly equity-focused with flexibility in choosing stocks across market segments.

Market Cap Allocation

Varies dynamically based on market opportunities and fund manager strategy.

Allocation can be diversified across large, mid, and small-cap stocks.

Fund Manager Discretion

High discretion to shift allocations based on changing market conditions.

Discretion in choosing stocks but often with a pre-defined mandate regarding market caps.

Risks

Market risks associated with equity investments, influenced by market cap exposures.

Exposure to market risks, influenced by the fund's diversification across market caps.

Tax Implications

Taxed based on the holding period and capital gains taxation norms.

Taxation follows applicable norms based on the holding period and types of capital gains.

Who Should Invest?

Investors seeking dynamic allocation and flexibility based on changing market conditions.

Suitable for investors looking for a diversified equity portfolio across market segments.

Benefits

Offers flexibility, potential for higher returns, and the ability to adapt to market dynamics.

Provides diversification benefits and the potential for returns across different market caps.

 

Who should invest in flexi-cap funds?

Flexicap mutual funds offer a suitable option for investors with a moderate to high-risk tolerance who aim to diversify their portfolios across various sectors and market capitalisations. It is crucial for these investors to have an investment horizon of at least five years.

Investing in small-cap companies can be riskier due to their higher volatility compared to large-cap funds. However, flexicap funds also allocate investments to large companies, which helps mitigate some volatility and provides investors with the stability they seek.

These funds are ideal for investors looking to achieve long-term goals such as children's education, marriage or retirement planning. If you are an aggressive investor seeking to capitalise on companies across different market capitalisations over a long period, flexicap funds could be the right choice for you.

Who should invest in multi-cap funds?

Multicap funds are suitable for a wide range of investors who seek diversified exposure to various market segments and are comfortable with moderate to high-risk investments. Here is a breakdown of who should consider investing in multicap funds:

Diversification across market capitalisations

Investors who prefer diversification across different market capitalisations, including large cap, mid cap, and small cap stocks, can benefit from multicap funds. These funds offer exposure to a broad spectrum of companies, which can help spread risk across different sectors and market segments.

Suitability for moderate to high-risk tolerance

Multicap funds typically invest across the market spectrum, which may include riskier mid cap and small cap stocks alongside more stable large cap stocks. Investors with a moderate to high risk tolerance who are comfortable with the potential volatility associated with mid cap and small cap investments may find multicap funds suitable for their investment objectives.

Ideal for long-term investors

Multicap funds are well-suited for investors with a long-term investment horizon. Since these funds invest across market segments and have the flexibility to adapt to changing market conditions, they can potentially deliver superior returns over the long term. Investors who are patient and willing to stay invested for several years may benefit from the growth potential of multicap funds.

Preference for active management

Multicap funds are actively managed by fund managers who have the flexibility to allocate investments based on market conditions and opportunities. Investors who believe in the expertise of fund managers and prefer an actively managed approach to investing may find multicap funds attractive.

Meeting specific financial goals

Investors with specific financial goals, such as retirement planning, education expenses, or wealth accumulation, can consider multicap funds as part of their investment strategy. These funds offer the potential for capital appreciation over the long term, making them suitable for investors with various financial objectives.

What are the advantages and disadvantages of flexi-cap and multi-cap funds?

Both flexicap and multicap funds have their own pros and cons, depending on various factors such as risk, return, performance, and suitability. Here are some of the main advantages and disadvantages of each category of mutual funds:

Advantages of flexi-cap funds

  • Flexicap funds offer the fund manager the freedom to adjust the portfolio according to the market dynamics and opportunities, which can enhance the returns.
  • Flexicap funds can capture the best of both worlds, i.e., the stability and safety of large-cap stocks, and the growth and potential of mid-cap and small-cap stocks, depending on the fund manager’s strategy and skill.
  • Flexicap funds can benefit from the changing trends and themes in the market, as the fund manager can switch to the sectors or segments that are performing well or have a positive outlook.

Disadvantages of flexi-cap funds

  • Flexicap funds can also expose the investors to the fund manager’s bias , as the fund manager has the discretion to change the portfolio composition at any time, which may not always work in favor of the fund or the investors.
  • Flexicap funds can also have higher volatility and risk, as the fund manager may take aggressive bets on certain segments or stocks, which may not pan out as expected or may face adverse market conditions.
  • Flexicap funds can also have higher expenses and turnover ratio, as the fund manager may frequently trade or rebalance the portfolio, which can increase the transaction costs and tax implications for the fund and the investors.

Advantages of multi-cap funds

  • Multicap funds offer the investors a diversified and balanced portfolio of stocks across the market cap spectrum, which can reduce the overall risk and volatility of the fund.
  • Multicap funds may also provide consistent returns, as the fund manager has to follow a predefined allocation rule, which can prevent the fund from deviating too much from the benchmark or the market performance.
  • Multicap funds can also suit the investors who do not have a specific preference or view on any market cap segment, and who want to invest in a simple and straightforward equity fund that covers the entire market.

Disadvantages of multi-cap funds

  • Multicap funds can also limit the fund manager’s ability to exploit the market opportunities or avoid the market risks, as the fund manager has to adhere to the allocation rule, which can restrict the fund’s performance and potential.
  • Multicap funds can also miss out on the higher returns or growth prospects of certain segments or stocks, as the fund manager has to maintain a minimum exposure to each segment, which can dilute the fund’s returns or impact.
  • Multicap funds can also face the challenge of finding quality and suitable stocks in each segment, especially in the mid-cap and small-cap segments, which can have lower liquidity, higher volatility, and higher risk.

List of flexi cap funds sorted by returns

Which is better flexi-cap or largecap?

The choice between flexi-cap and multicap funds depends on your investment objective, risk appetite, time horizon, and personal preference. Both categories of funds can help you achieve long-term capital appreciation, but they have different risk-return profiles and performance patterns. Therefore, you should consider the following factors before choosing between them:

  • Your risk appetite: If you are willing to take higher risk for higher returns, and you trust the fund manager’s expertise and judgment, you may opt for flexicap funds. If you prefer lower risk and stable returns, and you want to follow the market performance, you may opt for multicap funds.
  • Your time horizon: If you have a longer time horizon, and you can withstand the market fluctuations and volatility, you may opt for flexicap funds. If you have a shorter time horizon, and you want to reduce the market impact and uncertainty, you may opt for multicap funds.
  • Your personal preference: If you have a specific view or opinion on any market cap segment, and you want to align your portfolio accordingly, you may opt for flexicap funds. If you do not have any preference or bias on any market cap segment, and you want to invest in a diversified and balanced portfolio, you may opt for multicap funds.

Multi-cap versus flexi-cap - Who has done better?

Multi-cap funds have consistently demonstrated superior returns compared to their flexi-cap counterparts. Over the past year and three years, multi-cap funds have generated average returns of 43.88% and 21.45%, respectively, outpacing flexi-cap funds' returns of 39.81% and 18.04%.

Regulatory constraints have contributed to the outperformance of multi-cap funds. SEBI mandates that these funds invest at least 50% of their assets in smaller-cap stocks, which has led to a more diversified portfolio.

As of August, the average multi-cap fund had a 39.57% allocation to large-cap stocks, 26.08% to mid-cap stocks, and 29.08% to small-cap stocks. In contrast, flexi-cap funds had a higher exposure to large-cap stocks (62.83%) and a lower allocation to smaller-cap stocks.

Multi-cap or flexi-cap - Which is riskier right now?

Current market data suggests that the Nifty 50's price-to-earnings (PE) ratio is approaching its historical average. Conversely, mid-cap and small-cap segments exhibit PE ratios exceeding their long-term averages.

Risk assessment in multi-cap and flexi-cap funds

The risk profile of multi-cap and flexi-cap funds is primarily determined by the fund manager's investment allocation strategy. Flexi-cap funds, without fixed allocation constraints, can dynamically adjust their exposure to large-cap, mid-cap, and small-cap stocks. While a higher allocation to mid-cap or small-cap stocks may elevate risk, fund managers can mitigate volatility by shifting to larger-cap companies during market downturns.

Expert opinion on risk comparison

As per Viral Bhatt, Founder of Money Mantra, the current market scenario might make multi-cap funds appear riskier than flexi-cap funds. This perception stems from the mandatory exposure to more volatile mid-cap and small-cap stocks in multi-cap funds. In contrast, flexi-cap funds have the flexibility to focus on more stable large-cap companies, potentially reducing risk.

Points to remember when investing in multi-cap and flexi cap funds

There are a few considerations while deciding between flexi cap and multi cap funds:

Investment objectives and risk tolerance: Diverse investor types are well-suited to these funds. One option for a well-rounded strategy would be to look at multi cap funds. On the other hand, a flexi cap fund, which dynamically adjusts to market conditions, might be a better choice if you are willing to take on more risk in exchange for possibly higher rewards.

Investment horizon: Flexi cap funds and mid cap mutual funds both have strong long-term performance. Your time horizon, though, may affect the decision. Because of their flexibility, flexi-cap funds might do better in volatile periods.

Market conditions and economic outlook: The performance of funds can be impacted by market volatility. The adaptable approach of flexi cap funds may offer a benefit in hazy times.

Fund management and performance history: The experience of the fund management is quite important, particularly for flexi cap funds since the investment plan is based on projections from the market. Always take the fund's performance history into account.

Fees and expenditure ratios: Over time, lower expenditure ratios may lead to higher returns. Examine the expenditure ratios and performance of the midcap and flexi cap funds in conjunction with each other.

Should one invest in both flexi cap and multi cap funds?

Investing in both multi-cap and flexi-cap funds may be suitable if:

  • You have a high tolerance for risk.
  • Your investment horizon is at least 5 years.
  • You aim to capitalize on opportunities across different market sizes and industry sectors.
  • You are a young investor aiming for long-term wealth creation.
  • You seek to diversify your portfolio with multiple dynamic investment choices.

Conclusion

Flexicap and multicap funds are both viable options for equity investors, but they have different characteristics and implications. Understand the differences between them, and choose the one that matches your investment needs and expectations. Additionally, monitor and review your investments regularly, and make changes if required. You can even use the mutual fund compare tool to compare the returns of the flexicap and multicap funds on Bajaj Finserv mutual funds platform making your investment decision more accurate.

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Frequently asked questions

Can I invest in a Flexicap Fund for the long term?

Yes, Flexicap funds are well-suited for long-term investment objectives, offering flexibility to allocate assets across market capitalisations based on market conditions and fund manager discretion.

How does a Flexicap Funds function?

Flexicap funds operate with the flexibility to invest across various market segments, such as large-cap, mid-cap, and small-cap stocks. Fund managers dynamically adjust allocations to capitalise on market opportunities.

Which Flexicap Funds are 5-star rated?

Star ratings are subject to change based on market performance and ratings agencies. It's advisable to check current ratings from reliable sources like mutual fund rating platforms or financial institutions.

Which Multicap Funds are top-rated?

The top-rated Multicap funds may vary based on recent performance and rating agencies. For the latest information, refer to trustworthy sources that regularly update fund ratings and performance metrics.

How can I decide which fund type is right for me?

Consider your investment goals, risk tolerance, and time horizon to match fund types like equity, debt, or hybrid funds with your financial objectives and preferences.

Which fund type typically has lower expense ratios?

Index funds and ETFs (Exchange-Traded Funds) typically have lower expense ratios compared to actively managed funds due to their passive investment approach.

Do flexicap funds come with a lock-in period?

No, flexi cap funds do not come with a lock-in period, providing investors with the flexibility to enter and exit the fund at any time without any restrictions.

Which is better: multi-cap or mid-cap?

Multi-cap funds invest across different market capitalisations (large, mid, and small). Mid-cap funds focus specifically on mid-sized companies.

Consider multi-cap funds if you seek diversification, while mid-cap funds can offer higher growth potential with higher risk.

Which is better: flexi-cap or large-cap?

Flexi-cap funds have flexibility to invest across market caps. Large-cap funds primarily invest in large companies. Choose flexi-cap funds if you want a blend of large and mid/small-cap exposure, or large-cap funds for stability and lower risk.

Is flexi-cap fund good for long term?

Yes, flexi-cap funds can be suitable for long-term investment as they adapt to market conditions and provide flexibility. However, consider your risk tolerance and investment goals.

What are the disadvantages of flexi cap funds?
  • Market volatility: Flexi-cap funds can be volatile due to exposure to different market segments.
  • Managerial discretion: Fund managers’ decisions impact performance, which may not always align with your expectations.
  • Higher expense ratios: Flexi-cap funds may have higher fees compared to index funds.
How long should I invest in flexi-cap fund?

Long-term horizon ideally invest for at least 5 years or more. This allows the fund to navigate market cycles and potentially deliver better returns.

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