Flexi Cap vs Multi Cap Funds: What’s better for your portfolio?

Introduction: Understanding Flexi Cap and Multi Cap Funds

When it comes to equity mutual funds, Flexi Cap and Multi Cap funds are two popular choices, each offering unique advantages.

Flexi-cap funds allow investors to invest in various market caps, whether large, mid, or small. They adapt to market conditions and maximize returns by capitalizing on opportunities in any segment. 

However, in 2020, the Securities and Exchange Board of India (SEBI) introduced the Multi Cap fund category to ensure greater transparency and proper diversification. Before this, some funds claimed to be diversified but concentrated heavily on large-cap stocks, limiting their exposure to mid and small-caps. SEBI’s new mandate requires Multi Cap funds to allocate at least 25% of their assets to each market cap category, creating a more balanced and equitable investment approach

This article explores the key features and differences between Flexi Cap and Multi Cap funds, their benefits, and how they align with various investor profiles. By understanding their unique offerings, investors can make informed choices based on their financial goals and risk tolerance.

What are Flexi Cap Funds? 

Flexi Cap funds are equity mutual funds that provide dynamic portfolio management without any capitalization restrictions. 

Flexi-cap fund managers can allocate their assets among large, mid, and small-cap stocks based on their market analysis and growth potential rather than adhering to any predefined limits. 

To understand their flexibility, here’s how these market cap categories are defined:

• Large-Cap Stocks: These represent the top 100 companies by market capitalization. They are well-established, stable, and less volatile, offering steady returns.
• Mid-Cap Stocks: Rank between 101 and 250 in terms of market capitalization. They offer higher growth potential than large caps but come with moderate risk.
• Small-Cap Stocks: Include all companies beyond the top 250 by market capitalization. These are high-risk, high-reward investments, often showing rapid growth during favorable conditions.

Flexi-cap fund managers can dynamically shift allocations among these categories to maximize returns. For instance, during a bull market, they might increase exposure to small and mid-caps for growth, while in volatile times, they may favor the stability of large-cap stocks. This adaptability makes Flexi-cap funds suitable for investors seeking diversified exposure with the potential for high returns in changing market environments.

What are Multi Cap Funds?

Multi-cap funds are equity mutual funds that allow the fund manager to create a diversified portfolio of large, mid, and small-cap stocks.

Unlike Flexi Cap funds, Multi-cap funds have to invest equilibrated in each market cap category, with a minimum investment of at least 25% of their net assets.

This regulatory compulsion makes the fund offer a well-rounded portfolio by leveraging:

• The stability offered by large caps
• The growth potential of mid-caps
• The agility offered by the small-cap segment

This distribution balances the risks related to market volatility while allowing enough room for growth.

The ideal investors for multi-cap funds are those who would like to gain broad exposure to the market without having to monitor and constantly rebalance the allocations. Such a structured asset distribution approach makes Multi-Cap Funds integral to building a resilient investment portfolio.

Flexi Cap vs. Multi Cap Funds: The Better Investment Option

Here’s a detailed comparison highlighting multi cap vs. flexi cap funds across various aspects:

Aspect	Flexi Cap Funds	Multi Cap Funds
Investment   Strategy	Employ a dynamic investment approach, allowing managers to invest across any market cap without predefined limits	Maintain a disciplined strategy that requires investment in large, mid, and small caps, with at least 25% in each segment
Flexibility in   Allocation	High flexibility in adjusting investments between market caps based on market conditions	Limited flexibility due to SEBI’s mandatory allocation rules for diversification across all market caps.
Risk & Return   Profiles	Variable risk-return profile: returns depend on the manager’s ability to time and allocate investments effectively	Balanced risk-return profile due to the regulated and diversified allocation across different market caps
Tax Implications	Gains are taxed as equity funds: 15% for short-term capital gains (within 1 year) and 10% on LTCG exceeding ₹1 lakh annually	Same tax structure as Flexi Cap funds, offering consistent taxation for equity-based investments
Who Should Invest?	Ideal for aggressive investors with a higher risk tolerance and long-term investment horizons of 5+ years	Suitable for moderate-risk investors seeking steady, balanced exposure with a medium- to long-term horizon
Market Coverage	Covers all sectors and market segments without constraints, enabling focused investments in high-growth opportunities	Ensures comprehensive market coverage by investing equally across large, mid, and small-cap stocks

Benefits of Flexi Cap and Multi Cap Funds

Both Flexi Cap and Multi Cap funds offer distinct benefits tailored to different investor needs. The table below highlights their key advantages to help you choose the right fit for your investment goals.

Aspect	Flexi Cap Funds	Multi Cap Funds
Adaptive Allocation	Fund managers can freely change asset allocations between market caps to optimize returns.	Allocation must follow SEBI rules, maintaining 25% in large, mid, and small caps for balanced exposure.
Market Reactivity	React quickly to market changes, shifting between sectors or caps to capture opportunities.	Provides stability during volatility by balancing exposure across different market segments.
Growth Potential	High growth potential by investing in emerging trends across any sector or market cap.	Leverages growth opportunities in all market caps while maintaining a structured allocation.
Diversification	Offers a diversified portfolio without constraints, spreading risk effectively.	Mandated diversification ensures consistent exposure to all market caps, mitigating risks.
Balanced Exposure	Focuses on dynamic allocation, with exposure varying based on market conditions.	Provides equal exposure to large, mid, and small caps, ensuring a stable and balanced portfolio.
Consistent Performance	Dependent on market trends and fund manager decisions, leading to variable outcomes.	Resilient performance during market fluctuations due to disciplined allocation and diversification.
Broad Market Participation	Targets specific opportunities in high-growth sectors and segments across market caps.	Ensures comprehensive participation across all market caps and sectors, capturing overall growth.

Flexi Cap vs. Multi Cap Funds: Which Fund is Right for You?

Choosing between Flexi Cap and Multi Cap funds depends on one’s investment goals, risk tolerance, and horizon:

Investor Goals and Risk Tolerance

Understanding one’s financial objectives and capacity to handle risk is essential when selecting between these funds.

• Flexi Cap Funds: These are best for those seeking aggressive growth opportunities and who are comfortable with higher volatility. They are suitable if investors aim for significant returns and can handle market fluctuations.
• Multi Cap Funds: These funds are ideal for investors seeking a balanced approach with moderated risks. They offer stable returns through diversified exposure to all market caps.

Investment Horizon

The time frame of investment plays a crucial role in deciding the right fund type for one’s portfolio.

• Flexi Cap Funds: Recommended for investors with a long-term horizon, allowing time for the market to recover from volatility typically associated with high-growth investments.
• Multi Cap Funds: Suitable for medium to long-term horizons, as the diversified investment strategy can adapt to different market cycles, providing steady growth over time.

Top Flexi Cap and Multi Cap Funds to Consider

Over the past five years, both Flexi Cap and Multi Cap mutual funds in India have experienced notable growth in assets under management (AUM) and have delivered competitive returns.

Inflows and Assets Under Management (AUM):

• Flexi Cap Funds: Between January and October 2023, Flexi Cap funds received inflows of ₹8,862.9 crore, reflecting continued investor interest in their dynamic allocation strategy.
• Multi-Cap Funds: During the same period, Multi-Cap funds attracted higher inflows of ₹16,580.7 crore, reflecting a growing preference for their balanced and diversified investment strategy.

Category Returns Over the Last Five Years:

• Flexi Cap Funds: On average, Flexi Cap funds have delivered average annualized returns of approximately 16.23%. 
• Multi-Cap Funds: Multi-Cap funds have achieved higher average annualized returns of about 19.9% during the same period. 

Top Performing Funds Over the Last Five Years:

• Flexi Cap Funds:
  • JM Flexi Cap Fund: Delivered a 5-year annualized return of 30.76%. 
  • HDFC Flexi Cap Fund: Achieved a 5-year annualized return of 28.71%. 
  • Parag Parikh Flexi Cap Fund: Recorded a 5-year annualized return of 25.51%. 
• Multi Cap Funds:
  • Kotak Multicap Fund: Provided a 5-year annualized return of 22.08%. 
  • Nippon India Multi Cap Fund: Offered a 5-year annualized return of 31.61%. 

Sources – ET Money, ET Money2, MoneyControl

Conclusion: Choosing the Right Fund for Your Portfolio

Financial goals and risk appetite determine which fund, between Flexi-cap and Multi-Cap, is the better choice. 

Flexi-cap funds are optimal for those seeking aggressive growth and who can tolerate market volatility. They leverage opportunities across market caps without constraints. Multi-cap funds, on the other hand, follow a disciplined approach to investing in all segments of the market in a balanced manner, which helps mitigate risks and provide stable returns.

Since aligning goals with an investment horizon is important for effective portfolio management, the best fund depends on one’s unique financial situation and long-term investment strategy.

Disclaimer: The information provided is for informational purposes only. PowerUp Money is not responsible for any errors, omissions, or outcomes related to the use of this information.