Mutual funds become the first choice of first time investors, who do not have the time and knowledge to evaluate and analyse stocks and debts individually. Not only because of better returns but also due to risk diversification and flexibility in investment. Before clearing off the confusion let’s go through a small definition of multi cap and flexi cap funds.
Multi cap funds
Multi cap funds invest in different companies belonging to different sizes of capitalisation, whether it is small, medium, or large, irrespective of the theme of the company or stocks. It helps investors to get the benefits of the stability of large-cap funds and rally in small and medium cap funds. Fund managers invest at least 25% of the total fund in the stock of each market cap.
Flexi cap funds
Flexi-cap funds are also a type of mutual fund in which fund managers invest different sizes of market cap irrespective of the theme. In flexi cap funds, 65% of the total fund is to be invested in the equity of all the market cap.
In broader terms, both funds seem the same, but there is a slight yet significant difference in both schemes that can change your investment decision. Let’s understand some of them:
Ratio of investment
In the case of multi cap funds, fund managers are restricted to investing in small, medium, and large cap funds atleast 25% each. While in the case of flexi cap funds, there is no such restriction of ratio has been made by the SEBI. However, 65% must be invested in the equity of the companies.
During a time of a slow economy, large companies perform well and give stable returns, but when the economy improves, small and medium cap funds give much better returns than large cap funds. In such a case, restrictions made on the size of funds restrict your fund manager too to get you better returns.
In the case of flexi cap funds, the fund manager has enough freedom to shift your funds into the stocks which are expected to get decent returns. You may choose your fund on the basis of restrictions on ratio.
If you have a high-risk appetite to get greater returns in turn of taking higher risks and staying invested for a longer period of time, multi-cap funds are much better for you, as it takes a long time, around 5-10 years to avail desired results from medium and small-cap stocks.
On the contrary, if you do not want to take much risk and get stable returns, flexi cap funds might be a better choice for you, as you have a significant 35% of allocation in debt and other classes of assets.
The expense ratio depends on the activeness in the management of funds. When you invest in actively managed funds, you have to pay more expense ratio than passively managed funds. Actively managed funds mean when fund managers frequently buy and sell securities to gain the best returns. Flexi funds are more active funds, hence, you have to pay an expense ratio than multi-cap funds.
Based on the above-mentioned differentiating points, you can make your investing decisions effectively. Where allocation decides your risk and returns, cost decides your net returns, and suitability decides whether you should even invest or not.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com