Mutual funds have emerged as a pivotal component of investment portfolios. Within the spectrum of equity mutual funds lie various sub-categories. Among these, the battle between multi-cap funds and flexi-cap funds is a debate that often leaves investors pondering where to invest for optimal returns and risk management.
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CNBC-TV18.com spoke to experts across the industry to get an answer to this.
Decoding multi-cap and flexi-cap funds
Multi-cap funds diversify their investment portfolio across a spectrum of equity and equity-related stocks, spanning various market capitalisations as implied by their name.
On the other hand, a flexi-cap fund, as per Securities Exchange Board of India's (SEBI's) directive, operates as an open-ended, dynamic equity scheme.
It ventures into companies of all market capitalisations — be it large, midsize, or small — requiring a minimum of 65% of its total assets to be invested in equity and related instruments.
Investment considerations
Flexi cap's adaptive advantage
Deepak Gagrani, Founder of MADHUBAN FINVEST, a financial services firm, advocates for flexi-cap funds owing to their adaptable nature in portfolio allocation. He highlights their capacity to dynamically adjust across different market capitalisations,
What Gagrani means is that flexi-cap funds' flexibility allows the fund managers to move funds around strategically and potentially reduce the impact of market downturns or volatility.
By dynamically allocating investments, these funds can better manage risks and minimise losses.
Chakravarthy V, Co-Founder and Director of Prime Wealth Finserv, a mutual fund distributor, echoes this sentiment, emphasising flexi-cap funds' active management style that allows for continuous monitoring of market trends.
Multi cap's balancing act
Conversely, Shruti Jain, CSO at Arihant Capital, a financial services company, sheds light on multi-cap funds' approach, offering a blend of large-, mid- and small-cap stocks.
She emphasises that while multi-cap funds may carry higher risk than large-cap funds, they provide a balanced exposure across various segments, thereby potentially mitigating risks.
By spreading investments across different market segments, multi-cap funds aim to create a balanced exposure.
This diversification strategy is intended to potentially reduce overall portfolio risk, even though these funds may inherently carry more risk than those primarily focused on larger, more established companies.
Jain emphasises the importance of investors aligning their choices with risk tolerance and investment horizon.
Multi-cap funds, with a significant allocation towards small- and mid-cap stocks, are deemed more volatile, falling into the high-risk category. For those seeking higher growth potential and willing to navigate volatility, these funds might be preferable.
On the other hand, flexi-cap funds, though offering relative stability due to their bias towards large-cap and blue-chip stocks, still maintain exposure (around 25-30%) to mid- and small-cap stocks.
Investors inclined toward more stability but desiring a potential boost in returns might find flexi-cap funds more suitable.
A look at returns
Here are the 3-year and 5-year returns of some of the flexi-cap funds:
| Scheme Name | 3-year return | 5-year return |
|---|---|---|
| UTI Flexi Cap Fund - Direct Plan - Growth | 11.61% | 16.30% |
| Quant Flexi Cap Fund - Direct Plan - Growth | 32.95% | 28.53% |
| LIC MF Flexi Cap Fund - Direct Plan - Growth | 15.63% | 14.94% |
| Bank of India Flexi Cap Fund - Direct Plan - Growth | 27.82% | - |
| Canara Robeco Flexi Cap Fund - Direct Plan - Growth | 18.27% | 18.82% |
(Source: Moneycontrol)
Here are the 3-year and 5-year returns of some of the multi-cap funds:
| Scheme Name | 3-year return | 5-year return |
|---|---|---|
| Nippon India Multicap Fund - Direct Plan - Growth | 33.61% | 20.60% |
| Quant Active Fund - Direct Plan - Growth | 30.84% | 28.09% |
| ITI Multi Cap Fund - Direct Plan - Growth | 21% | - |
| Mahindra Manulife Multi Cap Fund - Direct Plan - Growth | 29.37% | 25.07% |
| ICICI Prudential Multicap Fund - Direct Plan - Growth | 25.45% | 19.09% |
(Source: Moneycontrol)
The bottom line
Ultimately, the choice between the two funds would depend on one's risk appetite, investment horizon, and desired returns.
Seeking guidance from financial advisors and staying abreast of fund performance and characteristics remains crucial in making informed investment decisions.
However, for more reference, one can go through this table to understand the difference in detail:
| Particulars | Multi-cap funds | Flexi-cap funds |
|---|---|---|
| Equity Exposure | Requires a minimum of 75% in equities. At least 75% of total assets must be in equity or equity-related instruments. | Requires a minimum of 65% in equities. At least 65% of total assets must be in equity or equity-related instruments. |
| Market Cap Allocation | Mandated allocation: 25% each in large-cap, mid-cap, and small-cap companies, as per SEBI regulations. | No mandate; free to invest in any market cap segment. |
| Fund Manager Discretion | Manager has freedom to select stocks and market capitalisation. | Limited to stocks within specified market caps. |
| Risks | Investment in large-, mid- and small-cap stocks implies higher risk compared to large-cap funds that focus on larger corporations. | Exposure to a broad range of equity securities, resulting in moderate returns. Offers flexibility in managing market volatility over a longer investment horizon. |
| Tax Implications | Short-term gains taxed at 15%. Long-term gains over ₹1 lakh taxed at 10%. | Short-term gains taxed at 15%. Long-term gains over ₹1 lakh are tax-exempt up to a certain limit; beyond that, taxed at 10%. |
| Who Should Invest? | Suitable for risk-tolerant investors seeking higher returns. | Attractive for those seeking large-cap-focused funds with tactical exposure to mid- and small-cap stocks, and willing to invest for at least 5-7 years. |
(Source: Groww)
(Edited by : Shoma Bhattacharjee)
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