Difference Between Multi Cap and Flexi Cap Fund

What Are Flexi-Cap Funds?

Flexi-cap funds were launched by the Securities and Exchange Board of India (SEBI) for greater flexibility, indicating their dynamic investing style in equities. They enable investors to invest their money in any market segment (large-cap, mid-cap, or small-cap stocks).

As the name suggests, flexi-cap fund meaning is defined by flexibility. It grants the fund manager freedom to change allocations as per their assessment of market conditions, sector outlooks, and perceived investment opportunities. However, these funds are mandated to invest a minimum of 65% of their total assets in equity and equity-related instruments.

What Are Multi-Cap Funds?

Multi-cap funds, as per SEBI guidelines, must invest at least 25% each in large-, mid, and small-cap stocks, with the remaining 25% at the fund manager’s discretion. This structure ensures mandatory diversification but limits aggressive inclination toward any single market segment.

Multi-cap fund meaning refers to diversification of stocks under a more structured framework, providing built-in risk distribution. However, their inflexible allocation can be a double-edged sword, limiting upside during mid/small-cap rallies while offering stability in downturns.

Difference Between Multi-cap and Flexi-Cap

Generating wealth through equity mutual funds requires a nuanced understanding of market dynamics, risk assessment, fund mandates, and differences between multi-cap and flexi-cap. Let’s compare flexi-cap with multi-cap to help you decide which should be a part of the portfolio:

Who Should Invest in Flexi-Cap Funds?

Flexi-cap funds resonate particularly well with:

• Investors who trust fund managers’ expertise to capitalize on market cycles.
• Those comfortable with higher volatility for potentially superior returns.
• Long-term investors who want a single fund adapting to changing trends.

Who Should Invest in Multi-Cap Funds?

• Multi-cap funds could be a more appropriate choice for:
• Investors seeking automatic diversification without manager bias.
• Risk-averse individuals who prefer regulator-mandated stability.
• Those who want consistent exposure across all market caps.

Which Fund Has Performed Better?

Historical data shows flexi-cap funds often outperform in bullish mid/small-cap phases due to their unconstrained approach. However, multi-cap funds provide steadier returns during downturns owing to their large-cap cushion.

For example:

• 2020-2021: Flexi-Cap funds surged 35-40%, while Multi-Cap averaged 25-30%.
• 2022: Multi-Cap fell ~12% vs. Flexi-Cap’s ~15% drop.

While comparing flexi-cap vs multi-cap, declaring a definitive performance winner between these categories can be potentially misleading. Therefore, instead of seeking a categorical winner between multi-cap vs flexi-cap, investors should analyze the performance consistency, risk-adjusted returns, and underlying portfolio of individual funds aligned with their objectives.

Which Fund Carries More Risk Today?

From a structural standpoint, multi-cap funds inherently carry a higher risk due to the mandated minimum 25% allocation to small-cap stocks and another 25% to mid-cap stocks. The risk profile of flexi-cap funds, on the other hand, is more dynamic and variable. It depends entirely on the fund manager’s current allocation strategy.

Therefore, we can conclude that the risk in flexi-caps is driven by managerial discretion, whereas in multi-caps, a significant portion of risk is structural.

How Should Investors Decide?

The decision between a multi-cap and a flexi-cap fund should be dictated by the investor’s core philosophy and risk tolerance. Here’s how you should decide:

1. Assess Risk Tolerance

If you prefer stability, go for multi-cap funds, and if you are comfortable with dynamic management, go for flexi-cap.

2. Check Portfolio Gaps

If your portfolio is already heavy in large caps, flexi-cap can add flexibility. But if you need broader diversification, multi-cap is simpler.

3. Evaluate Fund Performance

Compare 5-year returns across market cycles before making a decision between multi-cap vs flexi-cap. Along with analyzing downside protection in times of crashes.

Things to Remember When Investing in Multi-Cap and Flexi-Cap Funds

Regardless of your choice, certain principles remain vital:

• Both are equity funds; treat them as long-term investments to navigate market cycles.
• Carefully evaluate your risk tolerance before investing.
• While these funds diversify across market caps, ensure your overall portfolio is diversified across asset classes, such as equity, debt, gold, etc.
• Periodically review your fund’s performance and its alignment with your financial goals.
• Evaluate the reputation of the fund house and the experience and consistency of the fund manager.
• You can also combine the benefits of equity funds with Unit Linked Insurance Plans (ULIPs) with Kotak Nifty 500 Multicap Momentum Quality 50 Index Fund for a smarter investment.

Factors to Consider When Choosing Between Flexi-Cap vs Multi-Cap Funds

Beyond the core mandate difference between multi-cap and flexi-cap, consider these factors:

• As discussed, multi-caps have a structurally higher base risk. Assess your comfort with this versus the variable risk of flexi-caps.
• For flexi-caps especially, understand the manager’s investment plans. Assess if they are typically aggressive, defensive, growth-oriented, or value-oriented.
• If considering adding one to an existing portfolio, check for potential overlap in holdings to ensure effective diversification.
• Align the fund’s strategy with your specific financial planning and how long you plan to stay invested.

Should One Invest in Both Flexi-Cap and Multi-Cap Funds?

Yes, if:

• You want core stability of multi-cap along with tactical growth of flexi-cap.
• Your portfolio lacks both structured and flexible options.

No, if:

• You prefer simplicity and prefer sticking to one based on risk assessment.
• Your existing funds already cover both strategies.

Conclusion

Flexi-cap funds offer unparalleled flexibility, placing immense trust in the fund manager’s ability to dynamically allocate assets. Multi-cap funds, on the other hand, provide mandated diversification, ensuring investors maintain consistent exposure to large, mid, and small-cap stocks through market ups and downs. By understanding their differences and reflecting on your own financial profile, you can confidently make this choice and select the fund type best suited to help you achieve your investment aspirations.

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