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Multi-cap funds vs. Flexi-cap funds: Which one should an investor choose?

As an investor, you will often come across discussions on multi-cap funds vs. flexi-cap funds: Which one should an investor choose? In this article, we answer that all-important question.
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As an investor, you will often come across discussions on multi-cap funds vs flexi-cap funds: Which one should an investor choose? Before answering that question, let us first understand why an individual should invest in companies across market capitalisation: large, mid, small-cap companies.

Table: Performance of indices across market capitalisation on a calendar year basis | (Source: https://itiamc.com/admin/pdf/1627277892-Presentation_ITI_Multi_Cap_Fund.pdf)

Note: The above data is as of 30th June 2021. The percentage returns represent the calendar year returns. For large-cap returns, the Nifty 50 Index returns have been considered.

As seen in the above table:

  1. In the last 16 years, the various indices across market capitalisation have taken turns to outperform each other.
  2. Out of the last 16 years, the Nifty 50, which represents the large-cap stocks, has been the best performer five times.
  3. The NSE Midcap 100 Index has been the best performer five times.
  4. The NSE Small Cap 100 Index has been the best performer six times.

So, there is an even distribution of outperformance among large, mid, and small-cap indices over the last 16 years. Hence, it makes sense for you to have exposure to stocks across market capitalisation: large, mid, and small-cap stocks because you don't know which of them will outperform next year.

Overview Of Different Market Segments 

Before we go into the details of Multicap and Flexicap funds, it's vital to remember the three market capitalization segments in the stock market:-

Large cap: According to SEBI, large cap firms are the top 100 corporations in terms of market capitalization.

Midcap: The 101st to 250th corporations by market capitalization size are classified as midcap enterprises by SEBI. There are 150 stocks in the midcap category.

Small cap: SEBI classifies firms with a market value of less than $251 million as small cap.

Various indices across market capitalisation take turns to outperform each other

In the above section, we saw the calendar year performance of various indices across market capitalisation in the last 16 years. Now let us look at the performance of various indices across market capitalisation on a 1, 3, and 5-year basis.

Image: Performance of indices across market capitalisation on a 1, 3, and 5-year basis | Source: https://www.invescomutualfund.com

Note: The above data is as of 30th April 2021. The one-year returns are annualised. The three and five-year returns are CAGR.

As seen in the above table, the Nifty Multicap 50:25:25 TRI Index has given a return of 14.88% CAGR in the last five years. The index represents a combination of the large-cap index (50%), mid-cap index (25%), and small-cap index (25%). Only the Nifty Midcap 150 TRI Index could outperform the multi-cap index with a 17% CAGR in the last five years. So, over a long-term investment horizon, it makes sense to have exposure to large, mid, and small-cap stocks at the same time.

Multi-cap funds and flexi-cap funds can give you exposure to stocks across market capitalisation. However, there is a difference in how these funds give you exposure to stocks across market capitalisation. Let us understand these funds.

Multi-cap mutual fund schemes

SEBI has categorised various mutual fund schemes in its circular titled “Categorisation and Rationalisation of Mutual Fund Scheme”. A multi-cap fund is is an open-ended mutual fund scheme that invests a minimum of 75% of its total assets in equity and equity-related instruments. The 75% equity allocation should be spread across market capitalisation such that:

  1. A minimum of 25% allocation is towards large-cap companies,
  2. A minimum of 25% allocation is towards mid-cap companies,
  3. A minimum of 25% allocation is towards small-cap companies,
  4. The fund manager can make the remaining 25% allocation as per their discretion

As an investor, if you are looking for a minimum 25% allocation to each: large, mid, and small-cap stocks, then you should go for a multi-cap mutual fund scheme.

Performance of multi-cap funds

Now that we understand what multi-cap mutual fund schemes are, let us look at the performance of some of these funds.

Scheme nameAUM (Rs. crores)1 year3 years5 years
Quant Active Fund928.1068.48%26.52%22.60%
Principal Multi Cap Growth Fund809.0556.03%13.83%16.04%
SBI Equities Opportunities Fund – Series IV25.4753.12%13.02%15.75%
Invesco India Multicap Fund1,517.9757.79%14.30%15.71%
BNP Paribas Multi Cap Fund575.7554.64%16.42%15.27%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/flexi-cap-fund.html)

Note: The above returns are as of 23rd August 2021. The one-year returns are absolute. The three and five-year returns are CAGR. The returns are for direct plans (growth option). The ranking is based on five-year returns.

Historical Background of Multicap Fund Schemes

Though SEBI's circular on "Categorization and Re-classification of Mutual Funds" in October 2017 made "Multicap" a formal equity fund category, multicap schemes have been around for more than 25 years. Based on the fund manager's view, these funds could invest in various market cap sectors and modify market cap allocations. In bull markets, these funds would raise their allocations to mid and small caps, while in bad markets, they would cut their allocations to mid and small caps and shift to large caps.

These funds were popular with investors because they might provide greater returns over lengthy investment horizons than large funds while also having lower drawdowns than midcap funds in turbulent markets. When we look at the AUMs of equities funds by category, we see that they have a similar, if not bigger, the share of total AUM than large cap funds. The multicap category was formally launched by SEBI in 2017. Multicap funds, unlike big cap, large and midcap, midcap, and small cap funds, could invest any percentage of their assets in any market cap sector. Any market cap category had no upper or lower limit as long as the total equity allocation was at least 65 per cent.

Flexi-cap mutual fund schemes

As per SEBI categorisation of mutual fund schemes, a flexi-cap fund is an open-ended mutual fund scheme that invests a minimum of 65% of its total assets in equity and equity-related instruments across market capitalisation: large, mid, and small-cap companies.

In a flexi-cap fund, the fund manager can decide how much of the scheme money has to be invested in each category: large, mid, and small-cap companies without any minimum limits. Also, the fund manager can keep rotating the scheme money among companies across market capitalisation depending on where they see the market opportunity.

Performance of flexi-cap funds

Now that we understand what flexi-cap mutual fund schemes are, let us look at the performance of some of these funds.

Scheme nameAUM (Rs. crores)1 year3 years5 years
Parag Parikh Flexi Cap Fund13,186.7049.96%22.91%21.28%
PGIM India Flexi Cap Fund1,688.7066.82%24.33%20.56%
UTI Flexi Cap Fund20,921.6661.55%18.67%18.21%
Canara Robeco Flexi Cap Fund5,184.8348.45%17.79%18.11%
DSP Flexi Cap Fund5,985.4954.53%17.99%17.18%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/flexi-cap-fund.html)

Note: The above returns are as of 23rd August 2021. The one-year returns are absolute. The three and five-year returns are CAGR. The returns are for direct plans (growth option). The ranking is based on five-year returns.

Change Made By SEBI In 2020

SEBI modified the key characteristics of multicap funds in November 2020. Multicap funds were required to invest at least 25% of their assets in each of the three market cap groups, large cap, midcap, and small cap, under SEBI's new mandate.

As a result, multicap funds will have to invest a minimum of 25% of their assets in large caps, 25% in midcaps, and 25% in small caps. After allocating 25% each to big, mid, and small caps, the remaining 25% can be invested in any market cap group or asset class.

SEBI also created a new category of funds called Flexicap funds, which allowed investors to participate across market cap categories with no restrictions. In other words, previous to SEBI's November amendment, the mission of flexicap funds was the same for multicap funds. Many asset management firms simply renamed multicap funds as flexicap funds in reaction to SEBI's announcement. There was no change in the core investing approach of these multicap funds (which became flexicap funds) for investors.

On the other hand, some asset management companies did not convert their multicap funds to flexicap funds. Instead, they changed the scheme's core characteristics to suit SEBI's new multicap mandate.

Why Did SEBI Make this Change?

This adjustment was essential, according to SEBI, for multicap funds to be faithful to their labels. The name should reflect that the scheme's portfolio assets are diverse. For example, a scheme should not be dubbed a multicap fund if large cap stocks account for 80% of its assets. Since mid- and small-cap stocks began to fall in 2018, many multicap funds have shifted their portfolio to large-cap stocks. As a result, many multicap funds grew to resemble large cap funds over time. As a result, this adjustment required investors to make educated investment decisions.

Many multicap fund managers were hesitant to allocate a considerable portion of their assets to mid and small companies. They also desired the ability to adjust asset allocation based on market conditions. SEBI recognised the concerns and viewpoints of fund managers and asset management firms, and created the flexicap funds category. Flexicap funds are true to their name because they can invest in various market cap segments. Another rationale for SEBI's decision was to increase liquidity in the small-cap segment of the market.

How To Invest After This Change By SEBI

  • Since your risk appetite, you should invest in large cap funds rather than multicap funds if you wish to invest primarily in large caps.
  • Multicap funds are a good option if you wish to invest in various market cap segments. Multicap funds must have high risk appetites and extended investment horizons because they contain multiple allocations to mid and small companies (minimum 50% allocation to mid and small caps). Multicap funds, on the other hand, have the potential to outperform large cap funds over extended investment horizons.
  • You can invest in flexicap funds if you are unsure which market cap segments are appropriate for your investing needs and want your fund manager to pick which segments to invest in based on market conditions.

Multi-cap and flexi-cap funds: Which one should an investor choose?

As an investor, when it comes to choosing between a multi-cap or a flexi-cap fund, you have to consider the following parameters:

  1. Minimum equity exposure: If you are okay with an overall minimum equity exposure of 75%, you should go for a multi-cap fund. If you want to restrict the overall minimum equity exposure to 65%, you should go for a flexi-cap fund. 
  2. Minimum exposure across market capitalisation: If you want a fixed minimum of 25% exposure to each: large, mid, and small-cap stocks, you should go for a multi-cap fund. If you are okay with the fund manager dynamically managing the overall exposure to large, mid, and small-cap stocks as per market opportunities, you should go for a flexi-cap fund.

Investing in multi-cap and flexi-cap funds

In the above section, we have discussed how an investor can choose between multi-cap and flexi-cap funds. With the Glide Invest App, you have the option to invest in all kinds of mutual fund schemes, including multi-cap and flexi-cap funds. You will get the recommendations for the best mutual fund schemes based on your risk profile. You will get advice on how to plan and systematically invest towards your financial goals.

Conclusion

Flexicap funds aren't necessarily better than multicap funds, and vice versa. Diverse investors will benefit from multicap and flexicap funds. We've also talked about how to make smart investment decisions depending on your requirements. As usual, talk to your financial advisor to get a better understanding of the various mutual fund products and how to invest based on your needs.

With Glide Invest, you will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

FAQs

Q1: What is a multi-cap mutual fund, and how does it work?

A1: These are diverse mutual funds that can invest in stocks of various market capitalizations. They have companies in their portfolio that are large cap, midcap, and small cap. They are less hazardous than a pure mid cap or small cap fund and are appropriate for less aggressive investors.

Q2: Is there a difference between a Flexi Cap and a Multi Cap?

A2: During a lousy market, flexi-cap funds have the advantage of lowering their midcap / small cap company exposure to zero.

On the other hand, multi-cap funds may be well-positioned during a bull market because they include a minimum of 25% exposure to mid- and small-cap stocks.

Q3: How do you decide between a flexi cap and a mid cap?

A3: Flexi Cap will be able to shift between large, mid, and small cap stocks with greater ease, and they will strive to produce alpha from both stock and market cap selection. Multicap will have a more stringent mandate, emphasising stock selection with a pre-determined cap. Multi Caps outperform Flexi Caps in terms of mandate stability.

Q4: Is it a good idea to put money into a Flexi Cap fund?

A4: Flexi cap funds can invest in various market capitalisations and industries, making them ideal for investors with a moderate risk appetite. There are no flaws in the strategy. You can keep investing in it as long as the programme fits your risk profile and goals.

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