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.
Taxation of Multicap Funds and Flexi Cap Funds
Equity-oriented funds, including multi-cap and flexi-cap funds, must invest at least 65% of their assets in equities. Gains from these funds are taxed as Short Term Capital Gains (STCG) if held for less than 12 months and Long Term Capital Gains (LTCG) otherwise. STCG is taxed at 15%, while LTCG is taxed at 10% (without indexation) with a Rs. 1 lakh annual exemption.
Top Flexi Cap Mutual Funds in 2025
Top Multicap Mutual Funds in 2025
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.
Multi cap Mutual Funds: Three year returns
Rank
|
Fund Name
|
Three-Year Return
|
1
|
Nippon India Multi Cap Fund
|
28.03%
|
2
|
ICICI Pru Multicap Fund
|
22.81%
|
3
|
Mahindra Manulife Multi Cap Fund
|
21.85%
|
4
|
Baroda BNP Paribas Multi Cap Fund
|
20.96%
|
5
|
Invesco India Multicap Fund
|
20.62%
|
6
|
Quant Active Fund
|
20.54%
|
7
|
ITI Multi-Cap Fund
|
19.78%
|
8
|
Sundaram Multi Cap Fund
|
19.38%
|
9
|
Aditya Birla SL Multi-Cap Fund
|
18.44%
|
Data as on September 23, 2024
Multi-cap vs. Flexi-cap Funds: How should investors decide?
Here are two key tips to help you choose the right fund for your investment needs:
- Assess your risk tolerance: If you have a lower risk appetite or are approaching your financial goals, flexi-cap funds may be a better choice due to their dynamic allocation, which helps mitigate risks.
- Consider your investment horizon: For those with a long-term outlook and a higher tolerance for risk, multi-cap funds can be a suitable option. Despite short-term volatility, mid- and small-cap stocks in these funds have the potential to deliver strong returns over time.
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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