Multi-cap Fund VS Flexi Cap Fund

The one thing you want to do as a beginner investor is to mitigate investment risk as best as possible.  Investing in different mutual funds is the simplest way to do this. 

Now, if you’ve done your research well, you know you have two options - investing in flexi cap or multi cap funds. So which one should you choose?

This article goes over the differences between the two funds and gives you tips on picking the right one.

Difference in market cap

The key difference between them is the minimum allocation requirement to small, mid and large cap stocks.

Investors must invest at least 65% in equity in flexi cap funds according to SEBI guidelines. There are no restrictions for investments within a particular cap. This means fund managers can allocate different amounts of funds to different caps based on their strategy to minimise losses.

Multi cap funds however require investors to invest a minimum of 25% of the amount in small cap, mid cap and large cap funds, irrespective of the market performance.

For instance, when investors opt for flexi cap funds, they can invest 35% of their corpus in small cap funds, 15% of their corpus in mid cap funds and 50% of their corpus in large cap funds. However, in each of these investments, they must ensure 65% of the total amount is devoted towards equities.

In contrast, when investors invest in multi cap funds, they cannot invest 15% of their corpus in mid cap funds like the previous example. The minimum investment is 25% to every market cap.

In simple terms, flexi cap funds give fund managers greater control over investments. They can shift allocations easily between the different caps depending on market fluctuations.

In contrast, managers cannot freely make allocations since multi cap mutual funds require a minimum allocation account. This makes these investments more aggressive, and volatile compared to flexi cap funds.

How to decide between flexi-cap mutual funds and multi-cap mutual funds

When you invest in a multi cap mutual fund, you allocate funds to different market caps via a single fund. The fund allocation is a minimum of 25% per cap, meaning your fund allocation is a minimum of 50% towards small cap and mid cap funds. Now, these segments are known to be volatile.

So, although they might offer good returns, they are more suited for investors with a high-risk tolerance.

Not just that. Due to the minimum fund allocation requirements, managers cannot freely alter allocations, even if the market conditions are favourable. This limits the returns that one can earn through a good investment strategy.

In contrast, when you invest in a flexi cap mutual fund, your fund managers can change allocations at any time. Moreover, managers can choose to invest a lesser corpus in small and multi cap funds, given their high volatility, to ensure better returns. 

In simple terms, flexi cap investments are better for investors who can rely on their fund managers. After all, this means their managers will strategically choose investments based on market conditions and the investor’s risk tolerance.

Keep in mind that the volatility with small cap and mid-cap funds may reduce in the longer term. So, whether investors choose flexi cap or multi cap funds, they can maximise their return if they stay invested for greater than five years.

Now if you’re looking to invest in either of these funds but find the process arduous, check out tata Capital Moneyfy. The app has a large selection of funds that you can select from. Moreover, you can invest without paying additional charges.So, head over to the Moneyfy website or download the Moneyfy app, register yourself and fulfil the KYC formalities. Once that’s done, you can begin investing!