Difference between Multi-cap Funds and Flexi-cap Funds
Before moving to understand what is multi cap fund and what is flexi cap fund, lets have little intro of few types of mutual funds which are differentiated on the basis of market capitalization; large cap fund, mid cap fund and small cap funds.
LARGE CAP FUNDS: These are basically funds with a larger exposure towards stocks which have higher market capitalization. Basically 80% of the portfolio comprises of blue-chip stocks. These funds are composition of companies which are consistent performers in nature.
MID CAP FUNDS: These funds have exposure to midcap companies to the extent of minimum 65% in that category only. These funds offer higher risk and higher return compared to large cap funds as these funds invest in company which are aspiring future blue chip companies.
SMALL CAP FUNDS: Small cap funds invest 65% of the corpus in stocks which are small size companies. These funds are most volatile in nature but also are the highest return generators over a longer run.
While making investment in mutual fund, investor is puzzled where to invest money. For stability, large cap fund is a good option and for aggressive growth, small cap fund is a better option. Here comes the multi cap fund. Multi cap fund is a good option as it diversifies your investment in large cap, mid cap, small cap funds.
Fund manager of large cap fund cannot invest in stocks of small cap company though its showing good performance. But, with multi cap fund type, fund manager has right to invest in all types of market capitalization.
Before, September 2020, multi cap funds had the liberty to invest in companies with any market capitalizations without any restrictions. Fund manager needed to invest 65% of investment in any equity without any restriction on minimum exposure towards any market capitalization.
Now, as per the guidelines of Securities and Exchange Board of India(SEBI), a multi-cap fund should have a mandatory asset allocation of 25% in each of large-cap, mid-cap and small-cap stocks. The asset allocation to equities of each capitalization cannot drop below 25% but depending on the market developments, investment in any capitalization can go up to 50%. This new guideline is introduced as most multi cap funds turned into large cap focused funds and investor wanted returns by investing in mix of stocks.
The SEBI asked fund houses to comply with the new guidelines by making changes in the asset allocation of their multi-cap funds. If the fund houses wanted to continue following the old guidelines, they had to rename their multi-cap funds as ‘flexi-cap funds’.
The flexi-cap funds invest at least 65% of the total assets in equity investments without any defined limits for asset exposure to large, mid or small cap segments of the market.
The fund manager has the freedom to change the asset allocation depending on the markets. Suppose, if the fund manager do market research and understands that the particular equities in which the flexi cap fund has invested are not showing expected growth then he can change the allocation to alternate segment which has been showing good result. This is beneficial for investors who get chance to exit from unattractive stocks and invest in attractive stocks.
Also Read: EQUITY MUTUAL FUNDS AND 12 TYPES OF EQUITY MUTUAL FUNDS
Difference between multi-cap and flexi-cap funds
| Flexi-cap funds | Multi-cap funds | |
| Equity | Minimum 65% | Minimum 75% |
| Asset Allocation | No limits | Minimum 25% each in large cap, mid cap and small cap |
| Flexibility | Highly flexible as asset allocation is decided on performance of market | The asset allocation to equities of each capitalisation cannot drop below 25% |
| Who should invest | Investor who doesn’t want to take high risk | Investor who is aggressive in taking risk |
Conclusion:
If investor is looking for a balanced exposure to equities and equity-related instruments of companies across market capitalizations, then multi-cap funds is a good option. On the other hand, if investor believes in the fund manager’s capabilities and want to earn maximum profit by investing in equity as per market performance then flexi-cap funds is a good option.
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FAQ
Is Flexi Cap same as multi cap?
While flexi cap fund invests in equity investments without any defined limits for asset exposure to large, mid or small cap segments of the market, multi cap fund invest in equity investment with restriction of asset allocation of 25% in each of large-cap, mid-cap and small-cap stocks.
Should I have Flexi Cap fund in my portfolio?
Flexi cap funds offer a diversified portfolio due to which the flexi cap fund balances the risk and return. Fund manager has freedom to switch between different companies or sector as per the market performance.
Which is better large-cap or multi-cap?
While large-cap funds provide better stability, mid-cap and small-cap funds provide exceptionally high returns. Multi-cap funds are diversified equity funds that invest in stocks of companies with different market capitalizations. So, your money is invested in companies of all market capitalizations.
