When considering equity mutual funds that offer diversification, it often comes down to two popular options - Flexi Cap Vs Multi Cap funds. Both provide uncomplicated access to large-cap, mid-cap, and small-cap exposure, but operate under two totally different sets of rules given by SEBI. To make an informed investment decision that fits your investment goals and risk profile, it can be helpful to understand the differences between a Flexi Cap fund and a Multi Cap fund.
This short guide will note the major differences to narrow down your options.
What are Multi Cap Funds?
A Multi Cap Fund is a subset of equity mutual funds that has rules given by the Securities Exchange Board of India (SEBI) to invest in large-cap, mid-cap, and small-cap stocks. These funds are designed to give an investment in the broad investment universe of public equity in India.
The structured nature of Multi Cap Funds is that they must maintain asset allocation according to a rigid rule:
Minimum of 25% of the total assets in Large-Cap stocks.
Minimum of 25% of the total assets in Mid-Cap stocks.
Minimum of 25% of the total assets in Small-Cap stocks.
This structure guarantees that the fund keeps a well-diversified portfolio regardless of market conditions or the fund manager’s viewpoint related to a segment of market capitalization. This necessary diversification will manage risks by preventing the fund manager from being overconcentrated in one segment of the market, but will also hold the fund manager back from fully exploiting trends in that one segment.
If you want to gain a broader perspective on the stock market, please read our blog on Equity Market Basics. If you are interested in learning more about how to analyze individual stocks, you may want to learn how to analyze a Company’s Balance Sheet or consider signing up for the Fundamental Analysis Crash Course.
What are Flexi Cap Funds?
A Flexi Cap Fund is another type of open-ended equity mutual fund that invests in large-cap, mid-cap, and small-cap stocks. However, the important word in this name is the "flexi" since it refers to the flexibility provided to the fund manager with respect to the allocation of funds.
The simple rule for a Flexi Cap Fund is:
At least 65% of the total assets will be broadly allocated to equity or equity-related instruments.
There are simply no minimum allocation requirements for large-cap, mid-cap, or small-cap allocation.
The flexibility that a fund manager has in managing a portfolio is what allows them to adjust their focus based on their take on market valuations, economic cycles, and potential growth areas. For example, if the market is volatile, a fund manager can increase investments in relatively stable large-cap stocks to provide downside protection. However, if the market is in a bull market and mid- and small-cap stocks are showing significant growth potential, they can quickly increase an allocation to those areas of the market.
The beauty of the approach is that the fund manager’s skill can shine through. If you’re looking to get a better handle on market movement, make sure to check out our Guide to Technical Analysis in the Stock Market or the Advanced Technical Analysis Certificate Course.
Flexi Cap Vs Multi Cap: Key Differences
The difference between Flexi Cap and Multi Cap funds comes down to one simple yet important factor: the amount of flexibility the fund manager has in the selection of their securities.
For tax purposes, besides the 100% equity class of mutual funds, Flexi Cap and Multi Cap funds are both classified as equity-oriented mutual funds since they invest at least 65% of their assets in equities.
Short-Term Capital Gains (STCG): Gains realized from selling units within 12 months are taxed at a flat rate of 15%.
Long-Term Capital Gains (LTCG): Any gains realized from selling units after holding the investment for 12 months are taxed at 10% on any gains above ?1 Lakh in a financial year.
For detailed tax planning, refer to our blog on How to Calculate Capital Gains Tax in India.
Start with our Stock Market Trading Beginners Course for Investors and Traders under the Stock Market Online Courses category.
Which Fund is Better?
There is no one-size-fits-all answer to the question of which fund is superior, Flexi Cap vs Multi Cap. The best choice will entirely depend on your investing objectives, risk tolerance, and your level of confidence in the fund manager.
Choose a Flexi Cap Fund if
You Prefer Dynamic Management: You want the fund manager to have the discretion to move your portfolio between market caps, effectively acting on your behalf with a market-timing function that minimizes losses in a downturn and maximizes gains in a rally.
You Have a High Level of Confidence in the Fund Manager: The manager's ability to understand and respond to market cycles will directly drive your returns.
You Want Better Downside Protection: Historically, these funds have provided relatively better downside protection in bear markets by moving to a large-cap bias.
Dive deeper with the advanced Fundamental Analysis Course.
Choose a Multi Cap Fund if
You Want Structured and Balanced Diversification: You want to know that your investment will always maintain a predefined and balanced degree of exposure to large, mid, and small-cap stocks.
You Have a High Risk Tolerance for Higher Returns: The mandated minimum of 50% in mid and small caps creates a higher risk, but allows for higher potential returns in sustained mid/small-cap cycles.
You want to Mitigate Fund Manager Bias: The fixed mandate limits the manager's discretion, which ensures the fund stays "true-to-label" throughout market cycles.
Both Flexi Cap and Multi Cap funds are reasonable options for long-term wealth generation, but there is an incremental advantage to the Flexi Cap Fund. This fund allows investors to benefit from adaptability and a tactical approach.
Prepare for industry exams with modules like the Mutual Fund Distributors NISM Series VA Course.
Conclusion
Both Flexi Cap and Multi Cap funds offer a streamlined approach to diversifying your equity portfolio across market capitalization.
The Multi Cap Fund is based on the principle of mandatory, balanced diversification, which is what makes it a strong and diversified option, so it would still be the appropriate investment option for an investor looking for good and consistent exposure to dynamic small-cap growth stocks.
The Flexi Cap Fund is based on the principle of flexibility and active management. Meaning the fund manager has the discretion to chase value wherever that may be, at large, mid, or small-cap opportunities at any point in time.
When making a decision, think beyond the short-term investment performance. Look at the track record of the fund manager in managing investments through periods of various market cycles, and ensure the fund manager's investment philosophy closely corresponds with your own risk profile and investment horizon.
.jpg)
.jpg)
