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What Is the Difference Between Multi-Cap and Flexi-Cap Mutual Funds?

Multi-cap vs flexi-cap mutual funds: Where to invest for long-term capital  growth? - The Economic Times

When you think of investing, the term “mutual funds” is presumably the first thing that comes to mind. Mutual funds have grown in popularity recently and are important as an investment tool. They appear to be the most popular option among investors right now, owing to the higher returns they generate compared to the traditional investing methods. 

Understanding the differences between Mutual Funds types, on the other hand, is critical. Your investment may not generate good returns if you do not understand how Multi-Cap Mutual fund or Flexi-Cap Mutual funds work. This is because you are playing with your investments blindfolded. 

What are Flexi-Cap and Multi-Cap funds?

Previously, fund managers were allowed to allocate the scheme’s funds according to their preferences; fund managers and investors preferred greater exposure to large-cap stocks. However, fund managers must invest in all types of market cap stocks, given the current mandate. 

SEBI permitted funds to be introduced in a new category known as Flexi cap funds. This type of fund is allowed to invest flexibly across a preferred stock segment. Many mutual fund houses shifted their existing multi-cap funds into the Flexi cap category following SEBI’s announcement, particularly those with large AUM.

Following the SEBI mandate, there’s been considerable confusion between the two. The investment objectives of multi-cap funds and Flexi-cap funds have always been broadly similar, as both invest in stocks with varying market capitalizations.

Although a multi-cap fund provides excellent diversity with the equity asset class, stock selection can be difficult, particularly in the small-cap category. The exposure can be detrimental to performance during a market downturn.

On the other hand, Flexi-cap funds are required to invest at least 65 percent of their assets in equities, with no restrictions on market-cap exposure. This gives the fund managers total freedom to coincide the portfolio with the ideal segment based on the market trends.

Similarities And Differences Between Flexi Cap and Multi-Cap Funds

The main difference between multi-cap and Flexi-cap funds is the extent to which they are exposed to mid-and small-cap funds. More importantly, this difference can grow quite large depending on market conditions. If the fund manager deems it necessary, Flexi-cap funds can reduce their exposure to mid or small caps to zero; however, in the case of multi-cap funds, this exposure can never be reduced to less than 25% for mid and small-cap stocks.

Flexi-cap funds are a good option for investors who want to diversify their exposure across market capitalization. They should, however, consider if the fund is managed flexibly in response to market opportunities and has generated consistent performance that meets their investment objectives.

SEBI mandate

When it comes to similarities:

  • Flexi-Cap or Multi-Cap equity mutual fund sub-categories are appropriate for investors with a 5-year investment horizon and the stomach for high risk in the pursuit of wealth.
  • Whichever type of mutual fund scheme you choose, make sure it is compatible with your risk profile, investment objectives, financial goals, and time frame for achieving those financial goals.
  • Finally, if the scheme selection meets your needs, you can invest in a lump sum or through a Systematic Investment Plan (SIP). When the equity markets are expected to be volatile, SIPs will mitigate the risk with their built-in rupee-cost averaging feature and compound your wealth over time, allowing you to meet your financial goals.

Final Thoughts

The decision to invest in Flexi-Cap or Multi-Cap schemes should be based on your risk profile and overall portfolio construction rather than the current market situation. There is no hard and fast rule as to which is correct and which is incorrect. Everything is ultimately linked to the market. Before making a decision, the customer or investor must understand the investor’s objective standpoint. To reap the benefits of any fund you choose based on the fund manager’s long-term consistent performance, link it to your long-term goal.