Investing in multi-cap funds was once the best option for those looking to diversify their portfolio with equities of companies across market capitalisation. The fund managers of multi-cap funds had the liberty to modify the fund’s asset allocation depending on the market developments and trends.
The fund managers could increase allocation towards a particular capitalisation to any extent. However, the Securities and Exchange Board of India (SEBI) recently took away this flexibility by introducing flexi-cap funds. Multi-cap and flexi-cap funds may look similar, but there are a few stark differences between the two.
As per the guidelines of SEBI, a multi-cap fund should have a mandatory allocation of 25% towards each of large-cap, mid-cap and small-cap stocks. The asset allocation to equities of each capitalisation cannot drop below 25% at any time. Depending on the market developments, the exposure towards any capitalisation can go up to 50%.
Earlier, multi-cap funds did not have an allocation of 25% towards small-cap securities. The increased exposure to small-cap securities translated into investing in multi-cap funds unsuitable for risk-averse investors as their exposure to small-cap equities could go up to 50%.
The SEBI asked fund houses to comply with the new guidelines by making changes in the asset allocation of their multi-cap funds. If the fund houses wanted to continue following the old guidelines, they had to rename their multi-cap funds as ‘flexi-cap funds’. All fund houses (except two) opted to follow the old norms by renaming their schemes.
Flexi-cap funds invest in equities of companies across capitalisation with no fixed allocation towards any. The fund manager has the leeway to change the asset allocation depending on the markets. If you are worried about the high exposure of multi-cap funds towards small-cap, investing in flexi-cap funds is the right option for you.
The asset allocation of flexi-cap funds is mostly made towards large-cap stocks, giving you much-needed stability. The exposure towards mid and small-cap funds is not significant compared to large-cap, but enough to amplify your returns during a bullish market.
The following table shows the major differences between flexi-cap and multi-cap funds:
| Parameter | Flexi-cap funds | Multi-cap funds |
| Equity exposure | Minimum 65% | Minimum 75% |
| Small-cap exposure | Not fixed | Minimum 25% |
| Flexibility | Highly flexible as asset allocation can be modified as per market trends | Fund managers have to ensure that exposure towards all capitalisation doesn’t go under 25% |
| Balanced exposure | No, flexi-cap funds invest mostly in large-cap funds, exposure to small and mid-cap is restricted | The funds’ exposure towards all capitalisation is balanced to an extent |
| Suitable for | Risk-averse investors | Aggressive investors |
The current market scenario calls for investors to take caution. Given the market volatility, it would be best to invest in flexi-cap funds as the fund manager has the liberty to modify the fund’s portfolio depending on the trend. Also, higher exposure to large-cap stocks gives you stability, which may not be available with multi-cap funds as they invest a good sum of money in small-cap stocks.
For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in
Engineer by qualification, financial writer by choice. I am always open to learning new things.
