Mutual funds are one of the most popular investment options in India, as they offer a variety of benefits such as diversification, professional management, liquidity, and tax efficiency. However, not all mutual funds are the same, and there are different categories of funds based on their investment objectives, risk profiles, and asset allocation.
Two such categories are flexicap and multicap funds, which are both types of equity funds that invest in stocks of companies with different market capitalizations. But what are the differences between them, and which one is better suited for your investment goals? Let us find out.
What are Flexicap 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.
Who should invest in flexicap 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.
What are multicap 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.
Who should invest in multicap 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 seekers: 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.
- 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.
- 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.
- Active management enthusiasts: 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.
- Goal-oriented investors: 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.