Mutual funds offer a wide array of choices for investors to choose from especially for long-term investment. Two such options are Multicap funds and Flexi cap funds. Both these funds invest in stocks across different market capitalization. Largecap, midcap as well as smallcap stocks are a part of both these funds, however, there is just one distinction.
Multi-cap funds have a set minimum allocation across these categories whereas Flexi-cap funds do not have any such restrictions. Multi-cap mutual funds have been in existence for a long time while Flexi-cap funds were launched in November 2020.
Let's understand both these funds better:
Multicap Funds
Multicap funds have been a popular choice amongst investors who are looking for robust returns and have a higher risk appetite. Such funds have witnessed consistent returns over the years. However, in November 2020, market regulator Sebi came out with an asset allocation rule for such funds.
As per the new rules, multi-cap funds require to invest 25 percent each in smallcap, midcap and large-cap stocks and the remaining 25 percent can be invested in either segments or a mix of them. Earlier, there were no such minimum allocation criteria assigned to multicap funds.
While there is a 25 percent cushion given to fund managers to increase allocation in the category which is likely to do well, there is no room to decrease exposure in the category which is expected to perform poorly.
For example, in the case of a bull market, fund managers give more exposure to midcap and smallcap segments, since they are likely to do better than large caps and similarly in a bear market, exposure of small-caps is usually the least while exposure in large caps increases since they are safer bets.
But in the case of multi caps, 25 percent allocation has to be given to each largecap, midcap or smallcap segment. So even if the fund managers expect small-caps to be weak performing, they cannot reduce their exposure to less than 25 percent.
This, in turn, increases the risk for investors who are investing in such funds while the returns may be a little compromised since the hands of the fund managers are tied.
Mutual funds offer a wide array of choices for investors to choose from especially for long-term investment. Two such options are Multicap funds and Flexi cap funds. Both these funds invest in stocks across different market capitalization. Largecap, midcap as well as smallcap stocks are a part of both these funds, however, there is just one distinction.
Multi-cap funds have a set minimum allocation across these categories whereas Flexi-cap funds do not have any such restrictions. Multi-cap mutual funds have been in existence for a long time while Flexi-cap funds were launched in November 2020.
Let's understand both these funds better:
Multicap Funds
Multicap funds have been a popular choice amongst investors who are looking for robust returns and have a higher risk appetite. Such funds have witnessed consistent returns over the years. However, in November 2020, market regulator Sebi came out with an asset allocation rule for such funds.
As per the new rules, multi-cap funds require to invest 25 percent each in smallcap, midcap and large-cap stocks and the remaining 25 percent can be invested in either segments or a mix of them. Earlier, there were no such minimum allocation criteria assigned to multicap funds.
While there is a 25 percent cushion given to fund managers to increase allocation in the category which is likely to do well, there is no room to decrease exposure in the category which is expected to perform poorly.
For example, in the case of a bull market, fund managers give more exposure to midcap and smallcap segments, since they are likely to do better than large caps and similarly in a bear market, exposure of small-caps is usually the least while exposure in large caps increases since they are safer bets.
But in the case of multi caps, 25 percent allocation has to be given to each largecap, midcap or smallcap segment. So even if the fund managers expect small-caps to be weak performing, they cannot reduce their exposure to less than 25 percent.
This, in turn, increases the risk for investors who are investing in such funds while the returns may be a little compromised since the hands of the fund managers are tied.
Flexi Cap Funds
Introduced in November 2020, this is the newest category of equity mutual funds which have been garnering a lot of attention. Unlike the multicap funds, these funds have the flexibility to invest in the three segments - largecap, midcap and smallcap, without any minimum set allocation rule.
Depending on the market situation, fund managers can decide which segment to invest in most and which one to keep to a minimum. Like in a bull market, the fund managers can increase allocation in mid and small-cap stocks while in a bear market, he/she can increase allocation in large-cap stocks and decrease in small-cap stocks.
The flexible nature of these funds makes them very attractive for investors. There is no restriction of a minimum allocation, and the fund manager can choose primarily large caps or midcaps or large caps if needed.
Which one is better?
Since in multi caps, there is a set 25 percent allocation in the smallcap segment which can be raised up to 50, these funds are riskier than Flexi cap funds. In Flexi cap funds, the exposure to small-caps can be limited to as little as desired by the fund manager if the market situation demands it.
However, most Flexi cap funds have more exposure in large-cap stocks, so in the case of a bull market, investors may lose out on gains when the midcap and smallcap stocks outperform large-cap stocks. But in the case of a multicap fund, at least 25 percent of the fund is invested in midcap and smallcap each, so even if the remaining 50 percent is invested in large-cap stocks, there is less chance of losing out on gains from the broader markets.
Multicap funds should be preferred by investors who are happy with the fixed allocation approach to optimise their exposure across capitalisation. However, since the exposure cannot be reduced even if the segment is likely to do poorly in the future, only investors with a higher risk appetite and a long-term horizon should opt for multicap funds.
Meanwhile, investors who are comfortable with the fund manager’s ability to decide flexibility and segment exposure should stick with Flexi cap funds. Since the exposures can be changed, it is slightly less risky than multicap funds.