Summary

While multi-cap and flexi-cap mutual funds sound similar, there are significant differences between the two. Read this post to know the differences and decide whether they both deserve a spot in your portfolio.

Content

Investors prefer equity mutual funds for their long-term wealth generation potential. However, to make fund selection easier, SEBI has classified equity funds into various categories- two of them being multi-cap and flexi-cap funds.

While these schemes share some similarities, the guidelines based on which they build their investment portfolio are significantly different. Let’s take a detailed look at the meaning and differences of multi-cap vs flexi-cap funds to help investors make informed investment decisions-

What are Multi-Cap Mutual Funds?

Multi-cap funds, also known as diversified equity funds, invest in stocks across segments and sectors of the market. So, these schemes invest in large-cap, mid-cap, and small-cap stocks of companies across sectors. In October 2017, SEBI made it mandatory for multi-cap funds to invest at least 65% of their portfolio in equity and equity-related instruments.

Must Read - What are Equity Funds?

However, in September 2020, SEBI released updated guidelines according to which multi-cap schemes should mandatorily invest at least 25% of total assets in each large-cap, mid-cap, and small-cap stocks to offer improved diversification to the investors.

How Does the New SEBI Mandate for Multi-Cap Schemes Impact the Fund Managers?

To better understand flexi-cap fund VS multi-cap fund differences, it is essential to know why SEBI introduced flexi-cap schemes.

Equity markets are dynamic and volatile. As a result, managers of active schemes make regular adjustments to the scheme’s portfolio depending on their market outlook. This also means they sometimes must remain underweight on stocks from a particular market capitalization.

But the SEBI’s mandate for multi-cap schemes, where they must invest 25% of the assets in each large, mid, and small-cap companies, limits the flexibility with which fund managers adjust the scheme portfolio. As a result, in November 2020, SEBI introduced flexi-cap funds with a more flexible mandate.

What are Flexi-Cap Mutual Funds?

Flexi-cap schemes are open-ended dynamic equity funds that invest across sectors and market capitalizations. As per SEBI guidelines, these schemes should mandatorily invest 65% of the total assets in equity and equity-related instruments. However, unlike multi-cap schemes, they don’t have any capitalization-specific investment mandate.

So, for instance, if there is economic uncertainty and the fund manager wants to reduce the scheme’s small-cap exposure, it can be done as required by increasing mid-cap and large-cap exposure. If needed, exposure to stocks from a specific market capitalization can also be reduced to zero as long as the 65% equity investment mandate is followed.

Also Read - How to Invest in Mutual Funds?

What are the Differences Between Multi-Cap and Flexi-Cap Mutual Funds?

Here are some of the most significant flexi-cap VS multi-cap fund differences-

Should You Invest in Both Flexi-Cap and Mult-Cap Mutual Funds?

Multi-cap vs. flexi-cap difference primarily stems from the investment mandate these schemes must follow. But, apart from the mandate, both schemes offer diversification benefits and can be ideal for long-term wealth creation.

However, the decision to invest in both or choose one of the two depends on your investment objective and risk appetite.

• Invest in both multi-cap and flexi-cap schemes if your goal is to build a well-diversified equity portfolio.

• A flexi-cap scheme can be a good choice if you're looking for a more flexible investment strategy where exposure across market capitalizations can be increased/decreased as per the market outlook.

• You can consider investing in a multi-cap scheme

• if you want to remain invested across market capitalizations with fixed large, mid, and small-cap exposure across market cycles.

Making an Informed Mutual Fund Investment Decision

Being a savvy mutual fund investor requires you to know as much about all the different types of schemes available in the market. Now that you know flexi-cap VS multi-cap funds differences, you’re better equipped to make an informed investment decision.

But if you are still unsure about what to select, professional consultation from a financial advisor can help.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.