Flexi cap vs Multi cap funds: Which one is the better investment choice?

The flexi cap fund category is one of the largest equity fund categories in India. As of now, it has an AUM (Assets Under Management) of close to about ₹3.6 lakh crore. The multi cap funds, on the other hand, have a comparatively smaller AUM of ₹0.65 lakh crore.

Many first-time investors get confused between these two categories and find it tough to pick one. Let’s discuss what these two categories represent and how to find out which one suits your mutual fund portfolio requirements better.

Difference in market cap allocation

The key difference between flexi cap and multi cap funds is the difference in the minimum allocation that these funds are required to have to large, mid and small cap stocks.

Note – In order of market cap, the top 100 stocks are considered as large cap, the next 150 as midcaps and the stocks from 251st rank onwards are part of the small cap universe.

As per SEBI rules, while flexi cap funds need to have at least 65% in equity, there is no market cap linked restrictions. So theoretically, the fund managers can have as much allocation to large cap or midcap or small cap as per their strategy. But multi cap funds, as per definition, need to have a minimum of 25% each in large caps, midcaps and small caps. So, no matter what fund managers’ view is about the markets, the exposure to each market cap-category of stocks can never go below 25% each in multi cap funds.

What this means is that flexi cap funds have a much greater flexibility in picking and allocating to different stocks. The fund manager in the category can opportunistically shift allocations between large, mid, and small caps. But this flexibility isn’t available in multi cap funds due to the minimum 25% requirement to different market cap buckets.

How to decide which to pick?

Both funds follow different approaches and hence, cater to investors with different requirements.

If one wants exposure to all market caps (that too with a minimum level of allocation to all segments) via just a single fund, then multi cap funds are suited due to their minimum 25% rule. But this also means that a multi cap fund will always have a minimum of 50% allocation to mid-&-small cap. And these stocks, though have high-return potential, are also highly volatile and may not be suited for everyone.

There is another angle to it. Once the fund size grows large, the fund manager then has a very limited scope to reduce exposure to any market cap segment that they might expect to not do well in the short term. So basically, investors who have a comparatively higher risk appetite and have a longer investment horizon can consider multi cap funds.

Flexi cap funds on the other hand allow fund managers to move in and out of segments they deem suitable or unsuitable respectively at any point of time. While most flexi cap funds in India still have a major allocation to large caps, they are still not restricted to take different pro- mid-&-small cap investment calls as and when they want.

The fund manager has the freedom to assess different companies and invest in them regardless of their market caps. So, if the investor wants the fund manager to decide how much to allocate to different market caps, then flexi-cap funds would be the right option.

In my general view, here is how one can take exposure to various market caps while setting up a mutual fund portfolio –

• The major part of large cap exposure via large cap index funds or ETFs
• The major part of non-large cap (i.e., mid, and small caps) exposure via flexi cap funds
• If the investor has a higher risk appetite, then standalone exposure to mid and small cap stocks via midcap funds and small cap funds.
• And no, most investors do not need to invest in sectoral funds.
  
  Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.