Different mutual funds offer different benefits and come with unique risk profiles. While investment in large-cap funds may provide the benefit of steady growth combined with lower volatility, mid-cap and small-cap funds may outpace large-cap funds but are often highly volatile.
For optimal wealth creation in the long term, it is best to have a combination of different investments within a portfolio. This way, an investor can also minimise risks and benefit from risk-adjusted returns. Some of the equity mutual fund options, such as multi-cap funds and Flexi-cap funds, cover instruments across various market capitalisations to offer investors appropriate diversification.
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Both these fund categories are mandated by SEBI to invest across different market caps. However, there are some factors that are unique to each of these. Here, we will try to explain these two fund categories and how they differ in terms of characteristics, risk-reward parameters, among others.
How Flexicap and Multicap Funds Work
Meaning of multicap funds
Multicap funds can invest 65% of their total assets across large, mid, and small-cap stocks. SEBI has mandated that these funds should invest minimum 25% of their portfolio in each of large, mid, and small-cap categories. However, fund managers of these funds may not have an opportunity to completely cut out the exposure to a particular category that may be expected to perform poorly.
Benefits of multicap funds
Some of the noteworthy benefits of this fund type are:
- Multi-cap funds offer the flexibility to invest in equities as per the investor’s objectives, irrespective of market capitalization.
- These offer better opportunities for diversification across various sectors, especially when it comes to fast-growing industries which may not have large-cap companies.
- Fund managers can dynamically change the portfolio mix as per market conditions based on risks and opportunities. Thus, these are ideal for investors who do not have the expertise or capacity to closely monitor market movements for frequently making portfolio changes.
Meaning of Flexicap funds
These funds were introduced in November 2020 as per SEBI circular. Flexicap funds invest at least 65% of their total assets in equity investments with no fixed limits on the exposure to large, mid, or small-cap segments. Unlike multi-cap funds, Flexicap fund managers have the liberty to change their allocation across large, mid, and small-cap categories.
Benefits of Flexicap funds
Some of the key benefits of these funds are:
- Flexi cap fund managers can invest across various market capitalizations.
- These funds adopt a well-diversified equity strategy.
- These are better placed to capitalize on opportunities available in different market spectrums irrespective of sector or style.
- With a diverse portfolio, it balances the risk and return components well.
How are Multicap and Flexicap funds different?
The table below shows the main differentiating points of multi-cap and Flexi Cap funds:
| Parameter | Flexi-cap funds | Multi-cap funds |
| Equity exposure | Minimum 65% | Minimum 65% |
| Allocation across market caps | Not fixed, fund managers can decide percentage allocation to different market caps. | Minimum 25% in each large, mid, and small-cap as mandated by SEBI. |
| Flexibility | Higher flexibility in determining asset allocation as per market trends. | Limited flexibility to fund managers. They must ensure minimum exposure across all capitalisation is maintained at minimum 25%. |
| Suitability | Ideal for conversative investors. | May suit aggressive investors. |
| Historical performance | Since this fund category was introduced recently, investors may be unable to track historical performance of the selected fund. | Investors can go through the historical performance, however, it may offer limited perspective due to modified SEBI mandate on percentage of allocation. |
| Investment horizon | Suited for a 5 year investment horizon since these involve strategic allocation across market caps. | Ideal for a 5-7 year investment horizon due to comparatively higher mid-cap and small-cap exposure. |
Which fund should an investor select – multi-cap or flexicap?
Both multi-cap and Flexicap funds have certain SEBI mandates to be followed. Therefore, each adopts unique strategies to cater to investors with different risk profiles and return expectations.
While the multi-cap category allows fund managers to use their stock-picking skills, the mandatory percentage exposure across capitalisations poses a risk. This is because of limited scope available to fund managers in reducing exposure to a particular market cap expected to perform poorly in the future. Thus, the AMC is responsible to have appropriate framework in dealing with liquidity and risk challenges arising from small-cap investments.
Investors who are comfortable with a fixed allocation across capitalisations and have a higher risk appetite can invest in multi-cap funds. Investors must have a longer investment horizon to see maximum benefits from these funds.
Flexi-cap funds are not mandated to have a fixed minimum allocation across market capitalisation. This allows fund managers to use their conviction and skills in determining the right allocation. After evaluating the growth potential offered by different companies and irrespective of the market cap, a fund manager can freely invest in selected stocks. Fund managers, in this case, can track market segment performance and switch the allocation to an alternative market segment expected to perform well.
Taxation of Flexicap and Multicap Funds
The long-term capital gains (LTCG) tax on equity-oriented mutual funds is 10% on gains above Rs. 1 lakh per financial year. Short-term capital gains (STCG) tax on equity-oriented mutual funds is 15%. This applies to Flexicap and Multicap funds as well.
For example, if you invest Rs. 1 lakh in a Flexicap or Multicap fund and sell it after two years for Rs. 1.5 lakhs, then the LTCG tax will be applicable on the Rs. 50,000 gain above Rs. 1 lakh. The LTCG tax will be 10% of Rs. 50,000 which is Rs. 5,000.
When to invest in Flexicap and Multicap Funds
The best time to invest in Flexicap and Multicap Funds depends on various factors such as market conditions, economic indicators, and the performance of the funds. It is important to note that these funds are subject to market risks and investors should consult with a financial advisor before investing.
However, when you invest in a multi/flexi cap fund consider schemes based on its respective market cap allocation after assessing your own risk appetite to avoid taking undue risk.
Conclusion – Understanding the differences and making the right choice between Flexicap and Multicap funds
SEBI has intentionally set up different mutual fund categories to offer higher clarity to investors and allow them to make informed investment decisions. Investors may have different risk appetites, knowledge of the markets, return expectations, etc. While selecting between multicap and Flexicap funds, investors must consider these factors to accordingly make an investment decision.
FAQs
To explore options in multi-cap and Flexicap funds, you can download the Fisdom app on your smartphone. The app allows access to a wide variety of mutual funds with seamless investment process for all types of investors.
Blue-chip funds are mutual funds that invest in equities of well-established companies with large market capitalisation. These companies are mostly market leaders that have a positive and stable track record.
New investors should invest in mutual funds instead of high-risk investment avenues, like stock investments. With mutual funds, investors have the option of selecting a fund as per their risk/return appetite and investment time horizon.
Although focused funds are high-risk investments, they can help in maximising returns. Here, investors can maximise their capital gains by focusing on select stocks instead of spreading the investment across the market.
Mutual fund investments come with different degrees of risk depending on the fund type and objective. Equity funds are generally high on risk as compared to debt funds, but also offer better opportunities to fetch higher returns vis-à-vis debt funds.
