Flexi-Cap vs Multi-Cap Funds: Equity Diversification for the Discerning Investor

In a hurry? Read this summary:

• Flexi-cap and multi-cap funds are sub-categories of market-cap mutual funds, which are one of several types of equity mutual funds.
• Multi-cap funds have a fixed allocation of 25% large, mid, and small-cap stocks, ensuring broad diversification but with less room for adjustments. Flexi-cap funds are more flexible, with no minimum allocation requirements across market caps, and allow fund managers to adjust them based on market conditions and economic outlook.
• Flexi-cap funds are more actively managed, whereas multi-cap funds are passively managed, since they don’t offer as much flexibility to respond to evolving market conditions.

Mutual funds are cornerstones of a well-rounded investment portfolio. Investors can balance capital appreciation and preservation through diversification with mutual funds and avoid concentrated risks.

For investors with a stronger focus on capital appreciation, equity mutual funds are the answer to their needs. They offer exposure to equities across sectors, geographies, and market capitalisations while still mitigating the risks associated with equity markets, via diversification. Within this category, flexi-cap and multi-cap funds often attract investors’ attention with the breadth of assets they invest in.

Though they have similar objectives, flexi-cap and multi-cap funds differ significantly in portfolio strategies and investor suitability.

Understanding how flexi-cap funds ensure dynamic asset allocation

Flexi-cap funds are open-ended mutual funds that invest a minimum of 65% of their capital in equities, as per the rules of the Securities and Exchange Board of India (SEBI), across market capitalisations—small, mid, and large-cap. There is, however, no minimum threshold for asset allocation in each of these segments and is done solely at the fund manager’s discretion.

This ensures concentrated risks, arising from the underperformance of individual segments, are offset by gains from others. It also lets investors capitalise on emerging opportunities in real time.

How multi-cap funds ensure balanced exposure across segments

Multi-cap funds invest a minimum of 75% of their capital in equities, again, across the small, mid, and large-cap segments of the market. According to SEBI rules, however, they allocate a minimum of 25% of their capital to each of the three segments. Asset allocation with the remaining 25% is left to fund managers’ discretion.

Spreading capital across segments allows them to spread and mitigate risk effectively. This also helps balance risk and reward in one’s portfolio. Where large-cap stocks provide stability, mid and small-cap stocks offer opportunities for growth.

Key considerations for choosing between flexi-cap or multi-cap funds

Choosing between flexi-cap and multi-cap funds is not necessarily about picking one over the other. It is more about aligning each type’s advantages with one’s financial goals, market outlook, investment horizon, and risk profile.

Portfolio management and flexibility

Flexi-cap funds are suited to those looking to take on an actively managed approach to their investments, reviewing and rebalancing portfolios periodically as per market conditions.

Multi-cap funds on the other hand are more suited to those looking to take a hands-off approach to wealth creation, prioritising stability, and capital preservation.

Risk profile

One can consider flex-cap funds if they have a higher risk tolerance and are comfortable with dynamic asset allocations across market caps.

Multi-cap funds on the other hand, are better suited to risk-averse investors looking for a uniform exposure to all market caps, balancing capital appreciation with capital preservation. 

Flexi-cap and multi-cap funds both offer distinct advantages. It is important to remember, however, that both are inherently market-linked. While their diverse strategies may help mitigate risks and capture emerging opportunities, neither always guarantees capital appreciation.