Mutual Funds: Flexi-Cap Versus Multi-Cap Schemes

Flexi-cap or multi-cap are types of mutual funds, which are ideal for investors to create a balanced portfolio. However, there are certain differences between the two schemes. 

Flexi-cap funds invest across market capitalisation (large-cap, mid-cap and small-cap) stocks as well as different sectors or industry stocks. 

These funds invest about 65% of their total assets in equity and equity-related vehicles. The portfolio of flexi-cap funds is required to be rebalanced as per the prevailing market conditions. 

While being different from other funds, flexi-cap funds do not concentrate their investment in a single sector alone. These funds rather diversify their investment across various companies that belong to different market capitalisations as well as sectors. The fund manager rebalances the portfolio as per the changes in the equity market. 

For instance, if a fund manager analyses that the IT/ITeS sector will underperform in the next financial year, they will suitably remove the IT sector stocks to balance the risk and return. Therefore, the risk and reward are balanced in the case of flexi-cap funds. 

At the same time, multi-cap funds comprise companies with different market capitalisations  (large-cap, mid-cap, and small-cap) stocks in equal proportion. Such funds invest about 50% (25% each) into mid-cap and small-cap equities, while another 25% is required to be invested into large-cap equities. This totals up to an equity exposure of 75%. 

The remaining 25% can be invested into debt, equity or any other asset class depending on the overall investment objective of the fund. Generally, most multi-cap funds invest about 50% into large-cap dividing the rest equally into small-cap and mid-cap equities.

However, multi-cap funds are comparatively more volatile than flexi-cap funds. In the case of flex-cap funds, it is possible for fund managers to adopt a more defensive position by shifting the majority of their asset allocation into large-cap equities in a downmarket phase. In the case of multi-cap funds, considering the condition of minimum asset allocation of 50% into mid-cap and small-cap equities, this restricts the fund manager from undertaking this exercise.

Essentially, an investor should check the volatility of a fund by taking into account its standard deviation. It measures how much a particular mutual fund has deviated or moved from its average expected returns based on its historical track record. It is important to compare the funds based on their standard deviation and make a choice that aligns with the risk profile.

Moreover, it is crucial to know the investment goals before investing. For example, a multi-cap fund would not be the right choice if an investor’s goal is short-term (less than five years). There is high possibility that short-term volatilities could temporarily depreciate the value of a portfolio in such a case.