Many a times, investors get spoilt for choice while there are too many fund schemes on offer. And when these fund schemes appear and sound similar in spirit, the investors’ dilemma gets even bigger.
Something similar happens when investors are meant to choose between multi cap and flexi cap funds. Although both categories are meant to invest across the market capitalisation spectrum (i.e., small, mid and large cap) — the difference, like God, is in the details.
For the unversed, flexi mutual funds are mandated to choose the ratio of investment between large, mid and small caps as it deems them fit. On the other hand, multi cap funds are mandated to keep a minimum threshold of 25 percent in each of the three fund categories.
When this distinction was introduced after SEBI guidelines came into force in January 2021, several mutual funds in the multi cap category moved to the flexi cap.
Consequently, the multi cap space remains wide open with a number of AMCs yet to launch fund schemes in this space.
| Particulars | Multi cap | Flexi cap |
| October | ₹889 crore | ₹465 crore |
| November | ₹170.49 crore | ₹-863.43 crore |
| No of schemes | 15 | 33 |
As one can see from the table above, there are 15 multi cap schemes and 33 in the flexi-cap category. The former received an inflow of ₹889 crore in the month of October and ₹170 crore in November. Flexi cap, on the other hand, got slightly muted response with an inflow of ₹465 crore in October and an outflow of ₹863 crore in November.
Factor in your risk appetite
Before deciding to invest in any of the two fund categories, investors must consider their risk appetite since the multi cap funds have a minimum of 50 percent invested in small and mid-cap securities, making them more vulnerable to market movements.
“Flexi cap is better for investors with a low-risk appetite. Fund managers take a call on several parameters and they determine their asset allocation based on what internal research throws up. As a result, there is a higher large cap allocations. And larger the share of large cap, lower will be the risk appetite of investors. On the other hand, mid and small cap exposure increases in multi cap funds,” says Amol Joshi, founder of Plan Rupee Investment Service.
However, there is another side to the story i.e., multi caps have pre-defined risk whereas the risk which flexi cap funds undertake is uncertain.
“Whether an investor chooses flexi cap or multi cap depends on their risk appetite. In multi cap, investors are aware of the amount of risk they are undertaking whereas in flexi cap funds, they are not aware of the level of risk,” adds Mr Sridharan.
He elaborates this with an example. “Suppose a flexi cap scheme has 40 percent allocation to mid-cap and 30 percent each to large cap and small cap. When large cap stocks are expected to rise, the fund manager might allocate most of the portfolio to the large cap stocks. This way, investors’ wealth become more vulnerable to one category of funds. So, investors are unaware of the risk they take in flexi cap funds,” he adds.
On the other hand, in multi cap funds, investors are aware of the asset allocation i.e., a minimum of 25 percent each in large cap, mid cap and small cap funds.
The track record
It is also vital to understand that multi cap funds do not have a long track record since they came into existence (in their current form) after SEBI circular on September 11, 2020.
However, in the past two years mid and small cap stocks have outperformed their large cap counterparts. As a result, multi caps' higher allocation to these stocks has enabled them to outperform flexi-cap funds.
Also, a number of fund houses have launched funds in this category in the past one year. "Since they invested their funds when the market was down, they have managed to perform better than flexi cap funds," says Sridharan Sundaram, Founder of Wealth Ladder Direct.
So, before you choose to invest in either of the two categories — be aware of the fact that each of them carries a different form of risk.
