Multi-Cap vs Flexi-Cap Fund: Which is Better?

 Mutual funds were considered an easy way to invest. And to a large extent, they are.

However, it's not as simple as it appears. For first-time and do-it-yourself investors, the initial process can be daunting. This difficulty begins with the sheer number (2,000+) of mutual fund schemes available.

Furthermore, these schemes are categorized into equity schemes, debt funds, hybrid schemes, and other categories. Even within each category, the choices multiply quickly, with subcategories such as flexi-cap funds, large-cap funds, multi-cap funds, and many others within the equity scheme category.

Today, investing in mutual funds is as frictionless as ordering food through a mobile app. Investors often end up choosing schemes purely based on past returns. Meanwhile, the process of analysing whether the fund aligns with their risk tolerance, time horizon, or long-term financial goals is ignored.

In this editorial, we compare multi-cap and flexi-cap funds to help you make a more informed decision.

Three Major Types of Equity Schemes

Equity mutual funds are categorised based on the market capitalisation of the stocks they invest in.

Large-cap funds invest in the top 100 companies by market capitalisation. These well-established companies tend to be more stable. These schemes offer lower returns with lower volatility than small- and mid-cap schemes, making them suitable for conservative or risk-averse investors.

Mid-cap funds sit in the middle. They invest in medium-sized companies ranked 101-250 by market capitalisation. These funds offer higher returns than large-cap funds, but they come with greater volatility and require a long-term investment horizon.

Small-cap funds invest in companies ranked above the top 250 by market capitalization. However, these schemes are a double-edged sword. They offer high return potential, but they also fall more sharply than the broader market and may experience long periods of underperformance.

This is why these are suitable for investors who can tolerate higher risk and have an investment horizon of at least five years. Besides these schemes, there are other funds that invest across all three segments. Theoretically, such funds are better placed to navigate different market phases. This is where multi-cap and flexi-cap funds come into play.

What is a Multi-Cap Fund?

Multi-cap funds are required to invest at least 75% of their Assets Under Management (AUM) in equity and equity-related instruments at all times. Of this 75%, at least 25% must be allocated to large-cap, mid-cap, and small-cap stocks. In this way, multi-cap funds offer the best of both worlds.

The remaining portion can be allocated freely. This strict allocation framework limits the fund manager's ability to shift portfolio allocations in response to changing market conditions and valuation signals.

These funds offer investors greater diversification and long-term wealth-creation potential, but only over the long term. In the short term, they can be volatile, as at least 50% of the portfolio remains exposed to mid and small-cap stocks.

This is why multi-cap funds are suitable for investors with a high risk appetite and a long-term investment horizon. However, this higher exposure rewards multi-cap funds with higher returns in a strong uptrend.

What is a Flexi Cap Fund?

Flexi Cap funds invest at least 65% of their assets in equity and equity-related instruments. These funds can invest across market caps, with no minimum or maximum limits on large, mid, or small-cap stocks.

This gives fund managers flexibility to position the portfolio dynamically based on their assessment of market conditions, valuations, and economic trends. These funds can be heavily tilted toward large caps and gradually increase exposure to mid and small-cap stocks as opportunities arise.

Flexi Cap funds, for practical understanding, often sit between large-cap and mid-cap funds. In real-world portfolios, they are usually tilted towards large-cap stocks, with selective exposure to mid and small-cap names. This balance allows fund managers to manage downside risk while still participating in growth.

Risk versus Volatility

Risk-wise, multi-cap funds are more volatile than flexicap funds, especially during corrections in mid and small-cap stocks. The mandatory exposure to smaller companies means drawdowns can be deeper when sentiment weakens.

On the other hand, flexi-cap funds often manage volatility better, provided the fund manager actively adjusts the allocation. However, higher large-cap exposure during uncertain phases helps cushion downside, making return paths relatively smoother.

Flexi Cap Fund vs Multi Cap Fund

Particulars	Flexi Cap Fund	Multi-Cap Fund
Meaning	A fund that invests at least 65% in equity and equity-related instruments, with flexibility to invest across market caps.	A fund that invests at least 75% in equities and equity-related instruments, with a mandatory minimum allocation of 25% each to large, mid, and small-cap categories.
Portfolio Composition	Actively managed with dynamic asset allocation between large, mid, and small caps	Structurally diversified portfolio with fixed minimum exposure across market capitalisations.
Exposure	Minimum 65% in equity and equity-related instruments	Minimum 75% in equity and equity-related instruments
Allocation	No minimum allocation requirement across marketcap	At least 25% (each) must be allocated to large-cap, mid-cap, and small-cap stocks.
Fund Manager Discretion	High discretion, as allocations can be adjusted based on valuations, market conditions, and outlook	Limited discretion due to mandatory 50% allocation to mid and small-cap stocks
Risk Management	Relatively lower volatility, driven by the ability to increase large-cap exposure during uncertain phases	Higher volatility due to a minimum 50% exposure to mid and small-cap stocks at all times
Who should invest	Investors with a moderate risk tolerance looking for flexibility and a large-cap-oriented core equity allocation	Investors with a high risk appetite and a long-term investment horizon, who are comfortable with volatility and broader diversification

Which is Better?

Both are good options because they cater to the needs of different investors. Multicap funds offer the opportunity to invest in a broader range of stocks across large, mid, and small-cap segments. They benefit from structural diversification but demand patience and risk tolerance.

They provide exposure to fast-growing segments but also come with higher volatility, the potential for drawdowns, and periods of underperformance during weak market phases. As a result, they are suitable for investors who can tolerate higher risk and have a long-term investment horizon.

Flexi-cap funds, on the other hand, tend to offer relatively stable return profiles. Their flexibility allows them to adapt easily to changing market conditions, making them suitable for investors with moderate risk tolerance.

Ultimately, the right choice depends on your time horizon, risk tolerance, and confidence in the fund manager. Both types of funds can also coexist in a portfolio for diversification, with one providing stability and the other aiming for growth.

Ultimately, fund categories are merely frameworks. Wealth creation doesn't depend solely on choosing the right boxes, but also on staying invested through the cycles that test conviction the most. Fund performance also depends on the fund manager's ability to adapt to changing market conditions