Flexi-cap and multi-cap are two categories of equity mutual funds in India. Flexi-cap funds can invest across market capitalizations – large, mid, and small-caps – without any limitation. On the other hand, multi-cap funds need to invest a minimum of 25% each in large, mid, and small-cap stocks. So, flexi-cap funds have more flexibility compared to multi-cap funds when it comes to asset allocation.
Advantages of flexi-cap and multi-cap funds
Flexi-cap and multi-cap funds provide good diversification across market capitalizations. Instead of betting on just one market cap segment, they spread investments across large, mid and small-cap stocks. This reduces concentration risk. The fund manager can shift allocations between market caps based on valuations and growth outlook. This dynamic allocation allows optimizing returns over market cycles. In a downturn, the fund manager can increase exposure to defensive large caps. When small and mid-caps are expected to outperform, exposure can be increased there.
Should you invest in flexi-cap or multi-cap funds now?
Given the macroeconomic uncertainties and volatility currently, flexi-cap and multi-cap funds remain an attractive option for investors with a moderate to high risk appetite. Here’s why:
Flexibility in asset allocation to navigate volatility – Fund managers can dynamically shift between large, mid and small caps based on valuations, growth outlook and risk perception. This agility helps optimize returns.
Cushion against downturns – In a correction, large-cap allocation can be increased to lower volatility. As markets stabilize, mid and small caps can be added to benefit from their higher growth potential.
Diversification lowers concentration risk – Spread across market caps rather than just focusing on say large caps reduces concentration risk and volatility.
Potential to benefit from recovery – When mid and small-caps stage a recovery, their allocation can be increased to generate alpha.
Which should you pick – flexi-cap or multi-cap?
Choose flexi-cap funds if you are comfortable providing full flexibility to the fund manager on allocation between large, mid and small-caps. Go for multi-cap funds if you want a good balance and enforced diversification across market caps. Analyze the fund manager’s track record in flexibly allocating between market caps during various market cycles before selecting a scheme. Investing in 1-2 schemes from either category can potentially optimize your equity portfolio returns over the long run.
Conclusion
Flexi-cap and multi-cap funds are both good investment options for investors with a moderate to high risk appetite. Flexi-cap funds offer more flexibility than multi-cap funds, but they also come with more risk. Multi-cap funds are a more conservative option, but they may not offer the same potential for high returns as flexi-cap funds. Ultimately, the best option for you will depend on your individual investment goals and risk tolerance.