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    Multi-Cap VS Flexi-Cap Mutual Funds: Should You Have Both in Your Portfolio?

    Dec 05, 2022
    4 Min
    4 Rating

    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-

    Parameter

    Multi-Cap Schemes

    Flexi-Cap Schemes

     

    Meaning

    Diversified equity funds with investments in stocks across sectors, segments, and market capitalizations

    Dynamic equity funds that invest across sectors and market capitalizations

     

    Equity Exposure

    75% as per the updated SEBI mandate, with 25% each in small-cap, mid-cap, and large-cap stocks

    65% in equity and equity-related instruments with no capitalization-based restrictions; schemes generally have more exposure to large-cap stocks

     

    Portfolio Management Flexibility for Fund Managers

    Less flexible as exposure to large, mid, and small-cap companies cannot be lower than 25%

    More flexible as investments can be adjusted across sectors and market capitalizations

     

     

    Risk for Investors

    Can prove potentially riskier as allocation to stocks from any specific capitalization cannot be below 25%

    Can prove potentially less risky than multi-cap schemes as exposure is higher to large-cap stocks, but the risk level ultimately depends on fund managers and their investment strategies

     

    Who Should Invest?

    Ideal for investors with longer investment horizons with greater emphasis on equity diversification

    Ideal for investors with longer investment horizons but looking for a higher exposure to large-cap stocks with tactical allocations to mid and small-cap companies

     

    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.