Mutual funds are a popular investment option that gives you multiple benefits. You get liquidity, the potential to earn market-linked returns, and a professionally managed, diversified portfolio.
Moreover, there are different types of mutual fund schemes, so you can pick one based on your risk appetite and investment need.
Equity mutual funds are a class of mutual fund schemes that invest at least 65% of their portfolio in equity and equity-oriented securities. Equity mutual funds are further subdivided into different types based on the types of equity they invest in.
Multi-cap funds and Flexi-cap funds are two types of equity mutual funds that might look alike but are worlds apart. Let’s understand what these funds are, their differences, and how to invest in them.
What are multi-cap funds?
Multi-cap funds are equity mutual funds that invest in large-cap, mid-cap, and small-cap companies. As per the guidelines specified by the Securities and Exchange Board of India (SEBI), multi-cap funds are required to invest a minimum of 25% of their portfolio in each market capitalization, i.e., large-cap, mid-cap, and small-cap.
What are Flexi-cap funds?
Flexi-cap funds are equity mutual funds that invest in stocks across different market capitalizations. These funds have a flexible portfolio in the sense that the portfolio can invest across market capitalisation in any percentage. There’s no fixed rule of investment, and the portfolio is allocated at the fund manager’s discretion.
A comparative analysis of multi-cap funds and flexi-cap funds
Now that you have understood both types of funds, let’s compare them.
Similarities between multi-cap funds and flexi-cap funds
Here are some similarities that both these funds exhibit:
- Since both these funds belong to the equity mutual fund family, they have a high risk profile. The equity market has volatility risks, and so these funds are suitable for investors who have a high risk appetite.
- Despite the volatility risks, multi-cap funds and flexi-cap funds have a good potential for generating returns. Since the funds invest in the equity market, they can help your savings grow.
- Both the funds have a diversified portfolio that invests across all market capitalisation. This helps in risk mitigation and also enhances the return-generating potential of the scheme.
- You can invest in these funds either in a lump sum or through Systematic Investment Plans (SIPs).
- If you opt for dividend, the dividend received from the funds will be taxed in your hands at your income tax slab rate.
- If you redeem the funds within 12 months of investment, the returns earned will be taxed as short-term capital gains. A tax of 15% is levied on such returns.
- If you redeem your investment after 12 months, you can enjoy tax-free returns up to Rs.1 lakh. If the returns exceed Rs.1 lakh, 10% tax will be applicable on the excess return.
These are the basic similarities between multi-cap funds and flexi-cap funds. Now, let’s have a look at their differences.
Differences between multi-cap funds and flexi-cap funds
There are two main differences between both schemes. They are highlighted in the following points:
- Portfolio allocationThe first difference between these two funds is in their portfolio allocation. Multi-cap funds are mandated to invest at least 25% of their portfolio in all three market caps, viz., large-cap, small-cap, and mid-cap.
- Under any condition, the minimum allocation to each market cap cannot fall below 25%. As such, at least 75% of the overall portfolio of these funds is invested in the equity market.Flexi-cap funds do not have the minimum allocation mandate. They can invest in any market cap with the objective of maximizing the portfolio returns.
- In fact, flexi-cap funds can even choose not to invest across all market caps. They can limit the allocation to two types of caps if need be. The portfolio composition can change depending on the market dynamics and the fund manager’s decision. Thus, the minimum equity allocation in flexi-cap funds is required to be 65%.
- Flexibility for fund managers Under multi cap funds, fund managers are required to maintain a minimum of 25% allocation in each market cap. This limits the fund manager’s ability to change the portfolio allocation as per the market dynamics. The allocation can not fall below 25% even if the market might not favour a particular market cap.
- Flexi cap funds allow complete flexibility to the fund manager to change the market allocation at his discretion. There’s no restriction on the allocation to a particular market cap. Thus, fund managers can choose one or more stocks depending on the market movements. This way, they can minimize volatility risks by increasing the allocation to large-cap stocks, which prove more stable in a volatile market.
- On the other hand, in a bullish market, fund managers can invest more in mid-cap or small-cap stocks to maximize profitability. Thus, the flexibility under flexi-cap funds can help fund managers manoeuvre market movements and maintain the portfolio’s profitability.
Here’s a look at the differences in a table:
|Points of difference
|Minimum 25% each in large-cap, mid-cap and small-cap stocks
|Across different market capitalisation in no specific proportion
|Minimum equity expsoure
|Fund managers are restricted to maintain the asset allocation. This restricts their management ability.
|There’s no restriction on fund management. The allocation can be done in any proportion
Now that you know the differences, which fund, do you think is better for you?
The choice depends completely on your investment needs. If you don’t mind the allocation rigidity and want to expose your investment in all market caps, you can choose multi-cap funds.
On the other hand, if you want a flexible portfolio that changes according to market movements, flexi-cap funds will be a better fit.
So, assess your investment needs and preferences and then make a choice. While both are equity funds, their portfolios are differently managed.
This also alters their risk profile and return potential. Assess the risk profile of both funds, align it with your risk tolerance, and then choose a suitable fund. You can also invest in both these funds to diversify your portfolio and enjoy the benefits that each offers.
To invest, you can choose Koshex, which allows quick investments without any hassles. You can compare the schemes offered by different Asset Management Companies (AMCs) and then pick the most suitable scheme that has offered consistent returns for investors in the past.
- Why should multi-cap funds maintain a 25% allocation in each market cap?SEBI has mandated multi-cap funds to maintain a 25% allocation in each market cap. Thus, to comply with SEBI’s norms, multi-cap funds should maintain a minimum allocation of 25% in each market cap.
- Can multi-cap funds or flexi-cap funds yield a loss? Both multi-cap and flexi-cap funds are equity-oriented, whose performance depends on the equity market. So, if the equity market falls, these funds can yield a loss on your investment.