Multi-cap mutual funds have been in existence for a long time while flexi-cap funds were introduced only in November 2020. While multi-cap funds allow individuals to invest a minimum of 25 percent across large and mid-small caps, there is no such mandate for flexi-cap funds.
The key question, however, is how should investors pick between the two categories?
Experts say that investors must have different risks and return perspectives from both of these funds as they follow different mandates.
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Both these categories of funds invest across large, mid, and small-cap stocks. However, multi-cap funds have to invest a minimum allocation across these whereas flexi-cap schemes have no such restrictions.
This means that the flexi-cap category, as the name suggests, provides flexibility to the fund manager to enter into mid and small caps depending on the valuations and liquidity. There is no restriction of a minimum allocation, and the fund manager can choose primarily large caps.
As per Anup Bansal, Chief Investment Officer at Scripbox, the conclusion one can draw from this is that a multi-cap category is an option for investors who want exposure to higher risk and higher return categories — mid cap and small cap — at all times.
“The 25 percent minimum allocation, each to mid and small caps, means the volatility will be higher whenever there is a market correction, and that is not advised if an investor cannot bear higher volatility,” he said.
However, it's equally important to note that multi-cap funds have delivered far superior returns than flexi-cap over the past 3 years, as a result of the mid and small rally.
Despite this, Bansal believes that one should be careful while investing money in multi-cap due to a high allocation of a total of 50 percent minimum to mid and small caps.
In such cases, he thinks that investment in flexi-cap may be preferred but that may also mean higher allocation to large-cap depending upon the outlook and the preference of the fund manager. Ideally, one should not have a predominantly large-cap portfolio in an emerging market like India.
Bansal says that investors should work with their advisor to look at other mutual fund categories like large and mid-cap, small-cap where they can control the allocation suitable to their risk profile and personal situation.
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