Multi Cap vs. Flexi Cap – A Feature Comparison

A multi cap fund is a mutual fund that invests in equity-related instruments of large cap, mid cap, and small cap companies. Securities and Exchange Board of India (SEBI) mandates multi cap funds to invest a minimum of 25% of the funds in the stocks of companies across each market capitalisation.

Key Features of Multi Cap Funds

• Invests in stocks of companies across large cap, mid cap, and small cap.
• The funds are required to invest a minimum of 25% in each market cap, offering balanced exposure.
• These funds aim to generate wealth in the long term by diversifying across market sectors to strike a balance between risk and reward.
• Being equity investments, these funds carry very high risks.
• Some funds may have more exposure to mid or small cap stocks, increasing the risk compared to investment in large & mid cap stocks.

Dig Deeper: What is the difference between small-cap, mid-cap, and large-cap funds?

Here are some of the advantages of investing in a multi cap fund:

• A multi cap fund is required to invest a minimum amount in each market capitalisation, which offers investors a balanced exposure to market sectors.
• Multi cap funds aim to diversify their portfolio across companies and sectors. This helps them spread risk out and provide potential stability in the long term.
• Instead of being limited to one market capitalisation, investors can potentially benefit from returns across market caps.

Mid and small cap companies are typically more affected by volatility during broad market downturns. Compared to large caps, mid and small cap companies also carry higher risk because of their smaller size, which may lead to lower scale, brand recognition and even poorer corporate governance standards. This typically creates more performance divergence in the segment – some stocks may do extraordinarily well while others could see serious volatility.

Thus, a multi cap fund, by virtue of having a fixed minimum exposure to mid and small cap companies, could face higher underperformance risks compared to large cap funds, especially during downturns. Further, as they navigate a market where companies vary in quality, their portfolio is more sensitive to stock selection.

While picking between multi cap vs flexi cap funds, one should assess whether a mutual fund is suitable for them or not.

• A multi cap fund is suitable for investors who want minimum 25% exposure each across market caps.
• Suitable for investors aiming to generate wealth over a longer investment horizon.
• Suitable for investors who want a chance at getting potentially better returns than large cap funds but are also prepared for the higher risk and loss of capital / investment amount.

Flexi cap funds are equity mutual funds that invest in various market caps depending on the prevailing market conditions or investment opportunities. These funds have no restriction of minimum exposure requirements to invest in a particular market cap and have the flexibility to allocate funds as per the market environment.

For example, a flexi cap fund manager may decide to invest more in mid cap and small cap stocks when the market is stable with a possibility of growth. When the market is volatile or declining, the fund may invest more in the relatively stable, large cap companies.

• Flexi cap funds have the flexibility to invest in any market cap.
• There is no requirement to invest a minimum amount in a particular market cap.
• However, according to SEBI guidelines, flexi cap funds have to invest at least 65% in equity and equity-related instruments.
• Fund allocation is dynamic and depends on the conditions in the market. Investment decisions are taken at the fund manager’s discretion.
• Flexi cap funds are equity funds that carry very high risks.

Dig Deeper: What are Flexi Cap Funds? – Meaning and Examples

Let’s take a look at the advantages of flexi cap funds:

• Similar to a multi cap fund, flexi cap funds offer investors diversification. These funds can invest across market caps, industries, and sectors to build a well-rounded portfolio.
• Flexi cap funds can allocate funds based on the market conditions. For instance, the fund may decide to reduce exposure to small or mid cap stocks if the management feels broad-market volatility could rise. Similarly, the fund may increase exposure to such stocks if they expect a bull run in the near term.

• Since a flexi cap fund allocates capital across the market cap spectrum as per the discretion of the fund manager, the performance is subject to the fund manager getting their view right on which slice of the market may do well.
• Overconcentration of investments in a particular market cap can impact the fund’s performance and may expose it to higher risks.
• If a flexi cap fund frequently rebalances the portfolio or changes the fund allocation, it can result in higher costs and turnover ratio.

• Investors with a long-term investment horizon may find flexi cap funds suitable.
• Investors that want a higher risk-and-return profile compared to large cap funds, and who also want to give the fund manager the freedom to adjust portfolio market capitalization should opt for this fund.

While picking between multi cap vs. flexi cap funds, it is important to know the tax implications of them. Both funds are subject to capital gains taxes. Depending on the holding period, the gains may attract short-term or long-term capital gains tax. Dividends received from the mutual funds are considered as a part of your annual income and are subject to income tax as per the applicable slab rate.

When it comes to flexi cap vs multi cap funds, investors can benefit from taking a look at the primary differences between the two funds.

Investors, new and experienced, might have the question ‘multi cap vs. flexi cap, which is better?’  Flexi cap and multi cap funds offer diversification by investing across market caps and have the potential for wealth generation in the long run. While both funds have several similarities, it is important for investors to know the key differences between the two funds. Understanding how they allocate funds, the benefits, and risks can help investors make informed investment decisions.

Feature Product: Tata Flexi Cap Fund

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