Flexi Cap vs Multi Cap Funds: What's the Real Difference?:

When investing in equity mutual funds, investors have several fund categories to choose from based on their financial goals and risk appetite. Popular categories among these include Flexi Cap and Multi Cap Funds, which can offer investors exposure to companies of various market capitalisations. Given that both kinds invest in large, mid and small-cap stocks, it is easy to assume that they function in the same manner. 

However, the way these funds are structured and managed can be quite different. Investors can know what they are investing in by understanding their investment rules and portfolio requirements. Therefore, let's examine Flexi Cap and Multi Cap Funds and understand the difference between the two. 

Understanding the core

Flexi Cap Funds are open-ended equity schemes investing across large-, mid- and small-cap companies, with at least 65% of total assets invested in equity and equity-related instruments. They do not have any prescribed minimum allocation in any market-cap segment, enabling fund managers to make changes in the portfolio as per their strategy and market conditions. 

Multi Cap Funds also invest in all three market-cap segments, but with a more defined structure, where a minimum of 75% of total assets are invested in equity and equity-related instruments. They are required to invest at least 25% each in large-cap, mid-cap and small-cap stocks, thereby providing exposure into each of the three segments. This structure is different from other categories such as arbitrage funds, which follow a distinct strategy to seek returns from price differences between the cash and futures markets.

Flexi Cap vs Multi Cap funds: what really sets them apart?

Flexibility in allocation

Flexi Cap Funds give the fund manager more flexibility in determining the allocation of the fund's assets between large, mid, and small cap stocks. There is no fixed minimum allocation for any one of these segments.

Multi Cap Funds, however, must have at least 25% invested in each segment. This limits how much the fund can shift its portfolio towards one particular market-cap category. 

Equity allocation

Flexi Cap Funds are required to invest at least 65% of the total assets in equity and equity-related instruments. The remaining part may be invested as per the investment guidelines of the scheme.

Multi Cap Funds have a higher minimum equity allocation of 75%. In addition to that, the fund needs to keep a minimum 25% exposure to each of the three market-cap segments. 

Portfolio structure

A Flexi Cap portfolio can change its market-cap mix considerably over time. The fund manager may change the allocation in line with the investment strategy of the scheme and market conditions.

A Multi Cap portfolio must retain meaningful exposure to large-, mid- and small-cap companies. If the fund manager decides to make changes to the portfolio, the minimum allocation for each segment must still be maintained. 

Risk considerations

Do not assume that Flexi Cap Funds are less or more risky just because they are more flexible. This risk varies according to the stocks held, their allocation and the manner in which the fund manager handles the portfolio.

Multi Cap Funds will always have exposure to mid and small-cap stocks because of the mandatory 25% allocation. These segments can see more volatility in price, and investors should pay attention to what the fund has in its portfolio and what its investment philosophy is. 

How should investors look at Flexi Cap and Multi Cap funds?

We cannot say that any one category is automatically better than the other. Investors should ask themselves if the structure of the fund is compatible with their investment goals, risks and investment horizon. 

Investors looking for more flexibility can evaluate how a Flexi Cap Fund manager makes allocation changes based on market-cap. If an investor wants to make sure that he is exposed to all three segments, then he could consider Multi Cap Funds, which are required to hold a minimum of 25% of each segment. 

Prior to investing, it is important to review the fund's objective, portfolio, expense ratio, riskometer and investment strategy. Do not consider past performance as the only criteria to evaluate a mutual fund. 

Final takeaway

The key difference between Flexi Cap and Multi Cap Funds is their portfolio allocation structure. Flexi Cap Funds provide greater freedom to move across large-, mid- and small-cap stocks, while Multi Cap Funds must maintain at least 25% in each segment.

Flexi Cap Funds have a minimum 65% equity allocation, compared with 75% for Multi Cap Funds. Understanding these rules can help investors assess which type of portfolio structure aligns with their investment objectives, risk appetite and investment horizon.