Multi-Cap vs. Flexi-Cap Mutual Funds: Which Is Better for Investment in the Current Market?

Investing in mutual funds often brings the dilemma of choosing the right fund type for your portfolio. Two prominent categories in the market—multi-cap and flexi-cap funds—are particularly popular among investors looking for diversified exposure. But which one should you opt for, especially in the current market conditions? Let’s take a closer look at what each fund offers, their key differences, and how you can make an informed decision based on your investment goals.

Understanding Multi-Cap Funds

Multi-cap funds invest across large-cap, mid-cap, and small-cap stocks, providing exposure to a wide range of companies and sectors. These funds are required to maintain a minimum allocation across these categories. According to SEBI’s guidelines, multi-cap funds must invest at least 25% each in large-cap, mid-cap, and small-cap stocks. This means that fund managers don’t have the flexibility to change allocations freely based on market conditions.

While this structure ensures a diversified portfolio, it also introduces an element of risk. Small-cap and mid-cap stocks tend to be more volatile compared to large-cap stocks, and in times of market downturns, this fixed allocation can pose higher risks. However, the benefit of multi-cap funds lies in their potential to deliver substantial long-term returns due to their exposure to high-growth small and mid-sized companies.

Flexi-Cap Funds: A More Dynamic Approach

Flexi-cap funds, as the name suggests, offer flexibility in terms of where and how much to invest across different market capitalizations. Fund managers have the discretion to adjust the allocation between large-cap, mid-cap, and small-cap stocks depending on market conditions. This gives them the advantage of reacting quickly to market changes, potentially reducing risks during downturns by increasing exposure to stable large-cap stocks or taking advantage of rallies in mid-and small-cap segments.

Unlike multi-cap funds, flexi-cap funds don’t have fixed rules about how much should be allocated to each segment. This means that during a market rally, fund managers can heavily invest in mid- or small-cap stocks, but during uncertain times, they can pivot toward safer large-cap stocks, maintaining a balance between growth potential and risk mitigation.

Performance Comparison: Multi-Cap vs. Flexi-Cap

Looking at recent market data, flexi-cap funds have shown significant inflows, particularly after SEBI introduced new regulations for multi-cap funds in 2020. Flexi-cap funds offer the advantage of dynamic allocation, which allows fund managers to shift between different market segments based on performance and risk.

Data shows that multi-cap funds have performed well historically, with a significant portion of their returns driven by their allocation to mid-and small-cap stocks. However, flexi-cap funds have also demonstrated strong performance due to their ability to adapt to changing market environments. For instance, in bullish markets, flexi-cap funds may outperform multi-cap funds by increasing exposure to mid-and small-cap stocks, while in bearish markets, they may limit losses by focusing on large-cap stocks.

As of the latest data, multi-cap funds have returned around 39.8% over the past few years, while flexi-cap funds have delivered returns slightly higher due to their flexibility. However, it's essential to consider the risk involved, as the higher returns in flexi-cap funds often come with increased volatility.

Which Is Riskier?

The risk associated with both multi-cap and flexi-cap funds largely depends on market conditions and the fund manager’s strategy. Multi-cap funds carry a fixed level of risk because they must invest a portion of their assets in mid-and small-cap stocks, which are inherently more volatile. In contrast, flexi-cap funds can adjust their exposure to different market segments, making them more adaptable but also reliant on the fund manager’s ability to time the market correctly.

Data from the Nifty 50 PE ratio suggests that mid-and small-cap segments are currently trading above their historical averages, indicating potential overvaluation in these segments. This makes multi-cap funds riskier in the short term, as they are mandated to hold a portion of their portfolio in these potentially overvalued stocks.

On the other hand, flexi-cap funds have the advantage of reducing their exposure to these volatile segments if the fund manager deems it necessary, which may offer a lower risk profile in uncertain markets. However, if the fund manager’s market timing is off, flexi-cap funds may also experience underperformance.

Which Fund Should You Choose?

The decision between multi-cap and flexi-cap funds should be based on your investment goals, risk appetite, and time horizon. Investors with a higher risk tolerance and a long-term investment horizon may prefer multi-cap funds due to their potential for higher returns, especially from the small- and mid-cap segments. However, they should also be prepared for periods of volatility.

On the other hand, investors who seek a more balanced approach and want the flexibility to adjust to changing market conditions may find flexi-cap funds more suitable. The dynamic allocation strategy in flexi-cap funds allows for greater adaptability, potentially reducing risk during market downturns.

Before making a decision, it’s essential to review the fund’s historical performance, the fund manager’s track record, and how the fund’s asset allocation aligns with your financial goals. Regular monitoring of market conditions and rebalancing your portfolio based on your risk appetite will also help in making informed decisions.

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Both multi-cap and flexi-cap funds have their unique advantages and disadvantages. Multi-cap funds offer a balanced approach with exposure to all market segments, while flexi-cap funds provide the flexibility to adapt to market changes. In the end, the choice between these two fund categories should be guided by your investment strategy, risk tolerance, and long-term objectives.

Investors with a high tolerance for risk and a long-term focus may benefit from multi-cap funds, while those looking for more adaptability may prefer flexi-cap funds. As always, it’s crucial to stay informed and make adjustments to your portfolio based on market conditions and your evolving financial goals.

Reference: MoneyControl