Flexi-Cap vs Multi-Cap mutual fund schemes
Mutual funds are an excellent tool to grow your investments over the long term. These are market linked schemes that predominantly invest as per the nature and investment objective of the scheme. For example, debt funds invest in government bonds and fixed income securities. Hybrid funds invest in both equity and debt related instruments. Similarly, equity oriented schemes like multi cap funds and flexi cap funds invest the majority of their investible corpus in equity and equity related instruments of publicly listed companies. But how are these two funds different from each other? A lot of people have confusion between flexi cap funds and multi cap funds and aren’t sure which one to invest in.
What is a multi cap fund?
A multi cap fund is an equity mutual fund product that aims at generating capital appreciation over the long term by predominantly investing in equity and equity related instruments. This fund has the leeway to spread its portfolio across market capitalizations. As per market regulator SEBI guidelines, a multi cap fund must allocate a minimum of 25 percent each to mid cap, small cap, and large cap company stocks.
What is a flexi cap fund?
Flexi cap is a new product category introduced under the equity schemes gamut. It is understandable for some investors to confuse flexi cap funds with multi caps as both of them invest in different companies belonging to all types of market capitalizations. A flexi cap fund is an open ended equity scheme that invests in large cap, small cap as well as mid cap company stocks. But what distinguishes a flexi cap fund from a multi cap scheme is its ability to dynamically shift from one market cap to another. While multi caps must have a minimum exposure of 25 percent each in all the three different caps, SEBI mandates flexi cap funds to invest a minimum of 65 percent of their investible corpus in equity and equity related instruments of publicly listed companies. Since there is no mandate for allocating specific assets to specific market caps, a flexi cap fund can shift its allocation to any market cap that is currently lucrative and take advantage of different market cycles as well.
What is better – Flexi Cap or Multi Cap?
Since there is no mandate to market cap exposure, investors may feel flexi cap funds have the potential to generate better returns. However, flexi caps are fairly new and there aren’t many historical data to support that claim that a unique asset allocation can allow the portfolio to perform better. On the other hand, multi cap funds have been for as many as ten years and investors know the potential of these funds. Since the portfolio is spread across companies belonging to various sectors and industries, investors receive diversification as well as risk mitigation. In case either of the markets turns volatile, the multi cap fund manager can restrict its exposure to only 25 percent in that market cap and take advantageby exposing 75 percent of its assets to the other performing markets.
Flexi cap fund managers do not have to hold on to either of the market caps and can carefully study different stocks with growth potential and build a diversified portfolio. During bullish runs, flexi cap funds might not be able to perform well as the allocation depends on the fund manager. However, when markets are bearish that’s when flexi cap funds may outperform as these funds can move out of underperforming markets and switch their portfolio to performing markets.
