Multi-Cap and Flexi-Cap Funds: Which is better to invest? check here

New Delhi: Investors now often use mutual funds as their investment vehicle, and the number of demat accounts opened has increased significantly since the outbreak of COVID-19. Fund managers who pool money from diverse investors to provide returns run Mutual Funds. Even if you invest in equity funds, you must be aware of the flexi-cap and multi-cap fund categories. Naturally, you may be curious about which one is better and whether you should invest in them or not.

Multi-Cap and Flexi-Cap Funds
Multi-Cap and Flexi-Cap Funds

What is a multi-cap fund?

A form of equity investment called a multi-cap mutual fund invests in firms with different market capitalizations. The Securities and Exchange Board of India (SEBI) in a circular on September 11, 2020, provided regulations on what should be the minimum investment in each market category.

The regulator mandated that stocks and products with an equity-related focus should make up 75 per cent of the total investments of a multi-cap mutual fund. This cap is further broken down on the basis of market capitalisation.

Fund houses are advised to invest at least 25 per cent of their total assets across market segments – large-cap, mid-cap and small-cap businesses.

What is flexi-cap fund?

Flexi-cap funds invest in equities of different industries or sectors, as well as companies with different market capitalizations. Portfolios of flexi-cap funds must be rebalanced from time to time to reflect changes in the market. Unlike other funds, instead of concentrating its investments in a single sector, it has diversified its holdings across a number of firms that are part of diverse market sizes and industries. The portfolio is rebalanced by the fund manager in response to market fluctuations.

To balance risk and reward, the fund manager may, for example, withdraw stocks from the IT sector if he predicts that the industry will not do well in the coming year. As a result, the risk and return in Flexi Cap Funds are in equal measure.

What should you choose?

We have compared the two funds below:

The two funds employ different strategies, and as a result, they serve investors with different needs.

Due to their minimum 25 per cent criterion, multi-cap funds are suitable if one wants to get exposure across market capitalization (that too with minimum level of allocation across all segments) through just one fund. But it also means that a multi-cap fund will always allocate at least 50 percent of its assets to mid- and small-cap stocks. Even though these stocks offer great potential for returns, they are also highly volatile and may not be suitable for everyone.

The fund manager’s ability to hedge risk for any market cap category that they might expect will not perform well in the short term is severely constrained whenever the size of the fund increases. In other words, multi-cap funds are a good option for individuals who have a high risk tolerance and a long investment horizon.

On the other hand, flexi-cap funds provide the fund managers with the flexibility to enter and exit the segment at any point of time. Even if most flexi-cap funds in India continue to invest mostly in large caps, they are still free to take pro-mid and pro-small cap investment decisions, which they feel is appropriate.

The fund manager has the discretion to evaluate and invest in different firms, irrespective of their market capitalization. Thus flexi-cap funds would be the best option if the investor wants the fund management to choose how much to invest across different market capitalizations.

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