Multi-cap vs flexi-cap funds: Where should you invest?

Both these categories of funds invest across large, mid, and small-cap stocks. However, multi-cap funds have to invest a minimum allocation across these whereas flexi-cap schemes have no such restrictions.

This means that the flexi-cap category, as the name suggests, provides flexibility to the fund manager to enter into mid and small caps depending on the valuations and liquidity. There is no restriction of a minimum allocation, and the fund manager can choose primarily large caps.

As per Anup Bansal, Chief Investment Officer at Scripbox, the conclusion one can draw from this is that a multi-cap category is an option for investors who want exposure to higher risk and higher return categories — mid cap and small cap — at all times.

“The 25 percent minimum allocation, each to mid and small caps, means the volatility will be higher whenever there is a market correction, and that is not advised if an investor cannot bear higher volatility,” he said.

However, it's equally important to note that multi-cap funds have delivered far superior returns than flexi-cap over the past 3 years, as a result of the mid and small rally.

Despite this, Bansal believes that one should be careful while investing money in multi-cap due to a high allocation of a total of 50 percent minimum to mid and small caps.

In such cases, he thinks that investment in flexi-cap may be preferred but that may also mean higher allocation to large-cap depending upon the outlook and the preference of the fund manager. Ideally, one should not have a predominantly large-cap portfolio in an emerging market like India.

Bansal says that investors should work with their advisor to look at other mutual fund categories like large and mid-cap, small-cap where they can control the allocation suitable to their risk profile and personal situation.