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Understanding Multi-Cap and Flexi-Cap Funds: Key Variations and Considerations 

Introduction

In recent years, mutual funds’ interest rates have increased. The attractive returns of equity mutual funds help investors hedge against inflation. Mutual funds prove to be an exciting investment opportunity for long-term wealth creation, leveraging the best app for mutual fund investment

Different types of mutual funds offer varied returns. Equity mutual funds invest in securities, allowing you to earn better returns than any other type of investment. Two types of equity mutual funds exist multi-cap and flexi-cap funds. This blog will explore flexi-cap vs. multi-cap funds and understand their similarities and differences. 

What is the Flexi Cap Fund?

Flexi cap mutual fund is an open-ended fund that invests in multiple companies with varying market capitalisation. The fund manager chooses large, midsized, and small-cap companies and invests 65% of its assets in equity and equity-related instruments. It is a dynamic fund, and 35% is allocated to debt, cash, or other securities. 

Benefits of Flexi Cap Funds

Flexi-cap funds allow fund managers to choose where they want to invest. These funds can capitalise on market fluctuations. They have the following benefits:

  • Enhanced diversification across various companies in multiple sectors, reducing overall risk.
  • Excellent risk management allows fund managers to make adjustments based on the risks.
  • Dynamic nature allows for securing positions during market turbulence. 

What are Multi Cap Funds?

Multi-cap funds also invest in large-cap, mid-cap, and small-cap companies. SEBI has mandated that multi-cap funds invest at least 75% of assets in equities while ensuring equal allocation to each asset class. This means fund managers must allocate 25% of investments in large-cap, 25% in mid-cap, and 25% in small-cap companies with multi-cap funds.

Benefits of Multi Cap Funds

Multi-cap funds suit conservative investors who don’t want to invest more in volatile small-cap companies. Some of the benefits of multi-cap funds are:

  • Diversification is offered in terms of market capitalisation and sector
  • Risk is spread across different-sized companies and suitable for moderate risk tolerance
  • The fund manager must always ensure that investments are made as per the SEBI mandate

Similarities between Multi-Cap and Flexi Cap Funds

With the best website for mutual fund investment, you can invest in both multi-cap and flexi funds based on your goals. Let’s explore the similarities and differences between the two. 

  • Multi-cap and flexi-cap funds invest in companies across various market capitalisations, such as large-cap, mid-cap, and small-cap. The fund managers can make adjustments to the investments based on market conditions. However, multi-cap funds must distribute 25% of their assets to large-cap, mid-cap, and small-cap funds. The remaining can be invested in debt, cash, or other securities. 
  • With both types of funds, the fund manager can choose securities based on valuation, growth potential, earning quality, competitive advantage, etc. They can make changes to portfolio allocation based on updated market conditions. So, choosing the best fund manager to manage your investment professionally can increase your returns and yields. 
  • Both multi-cap and flexi-cap funds provide a balanced exposure to equities. These funds allow you to benefit from small-cap companies’ growth potential, which can even outperform the performance of large-cap companies. However, you must remember that these small-cap companies are more volatile. 
  • The fund manager’s skill in managing the funds and adjusting portfolio allocation determines your yields. Before investing in multi-cap or flexi-cap funds, research the fund manager, their experience, and investment philosophy. 
  • After the SEBI mandate, several multi-cap funds were transformed into flexi-cap funds so the fund managers could maintain a dynamic portfolio without being limited by the new mandate. 

Difference between Multicap and Flexicap

FeatureMulti-Cap FundFlexi-Cap Fund
Investment MandateInvest in stocks across all market capitalisations (Large-Cap, Mid-Cap, Small-Cap)Invest in stocks across all market capitalisations (Large-Cap, Mid-Cap, Small-Cap)
Allocation RequirementMinimum 25% allocation in each market capitalisation (Large, Mid, Small)There is no minimum allocation requirement in any market capitalisation
Fund ManagementA more structured approach, maintaining a balanced allocation across market capsIn a dynamic approach, the fund manager can adjust allocation based on market conditions
Risk ProfileModerate risk, balanced by diversification across market capsModerately high risk, the potential for higher returns but also higher volatility due to flexibility in the allocation
SuitabilityInvestors seeking balanced exposure to different market segments with moderate riskInvestors comfortable with a more dynamic approach, seeking potentially higher returns and willing to tolerate higher volatility

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Conclusion 

Investors looking to capitalise on a company’s growth potential can benefit from multi-cap and flexi-cap funds. Large-cap stocks are established companies with proven track records. However, they will not have a steep growth trajectory. Some mid-cap and small-cap companies could outperform large-cap companies based on different market cycle phases. The yields from these types of mutual funds depend on the efficiency of the fund manager. The best app to invest in mutual funds helps you to diversify your portfolio with different types of mutual funds that align with your risk tolerance, investment horizon, and goals. 

FAQs

  1. Are multi-cap and flexi-cap funds active funds?

Yes, multi-cap and flexi-cap funds are active as they don’t follow any specified benchmark. The fund manager can actively use their research and analysis to select stocks and securities. They rebalance the portfolio periodically to maximise returns. 

  1. Are large-cap funds better than multi-cap and flexi-cap funds?

Regarding risk profile and diversification, large-cap funds are less riskier than multi-cap and flexi-cap funds. However, they offer better returns. So, if you want long-term investments with growth potential, multi-cap and flexi-cap funds are better. 

  1. Which is the best type of fund – multi-cap or flexi-cap?

The multi-cap fund is suitable for investors looking to lower their risk. The mandate to invest in all market segments helps to mitigate risk in such funds. Flexi-cap funds cater to risk-seekers aiming to capitalize on market volatility. With no mandate to invest in specific market segments, fund managers can pursue the most promising opportunities.

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