Mutual fund investment: Flexicap funds or multicap funds - where can you get more returns? 

Investing in the financial markets, whether through stocks or mutual funds, requires careful research and evaluation. Traditional advice emphasizes the importance of diversification, especially during market highs or lows. One effective way to achieve diversification is by investing in multi-cap and flexi-cap funds, which spread investments across various market capitalisations, including large-cap, mid-cap, and small-cap stocks.

Multi-cap and flexi-cap funds are among the most significant and popular equity fund categories in the mutual fund industry. Since January 2021, flexi-cap funds have attracted net investments of Rs 72,248 crore, while multi-cap funds have received net inflows of Rs 88,856 crore during the same period.

What are Flexi cap funds?

Flexicap funds are equity funds that have the flexibility to invest in different market capitalization segments such as large-cap, mid-cap, and small-cap stocks, without stringent limitations. This allows the fund manager to dynamically adjust the fund's allocation based on current market conditions, to capitalise on potential opportunities, and to evaluate valuations accordingly.

"As per the definition, flexicap funds are equity mutual funds that invest in companies across various market capitalisations. The fund manager has the flexibility to shift allocations based on market conditions & opportunities. Currently, on an average fund managers are holding ~55% into large-caps, 40% in SMID companies and the rest into cash.  Owing to the dynamic allocation strategy, these funds can potentially deliver robust returns over the medium to long term," said Siddharth Alok, AVP Investments, Multi Ark Wealth-Epsilon Money.
 
Flexi-cap funds have gained substantial popularity among individual investors, with a total of 39 schemes in this category accumulating a combined AUM of Rs 4.30 lakh crore, making it the second-largest category in terms of asset size after sectoral schemes.

There are 39 flexi-cap funds available in the capital market with total assets under management (AUM) of Rs 4.29 lakh crore as of August end, while there are 26 multi-cap funds with an AUM of Rs 1.73 lakh crore.

“Higher diversification by spreading investments helps balance risk and reward for these funds. Historically, flexi-cap funds tend to perform better in volatile markets due to this ease of spreading investments across the board,” Varun Goel, senior fund manager–equity, Mirae Asset Investment Managers (India), said. 

Multicap funds

Multicap equity funds provide investors with the opportunity to invest in companies of various sizes and across different sectors. This flexibility enables fund managers to allocate funds among large, mid-sized, and small companies based on market conditions.

These funds offer exposure to all key sectors that are propelling the Indian economy forward, making them an ideal investment choice for a horizon of 5 years or more. By investing in multi cap funds, investors can eliminate the need to purchase multiple funds in order to achieve comprehensive market coverage.

"As far as Multicap funds are concerned, they must adhere to a mandated allocation – allocating at least 25% each in Large, Mid, & Smallcap segments. Risk profile-wise these funds come with higher risks, but in the bull market, they may also potentially do well. Smallcap funds focus primarily on investing in those companies which are typically ranked below the top 250 companies in terms of market capitalisation. These companies are usually in the early stages of growth with significant potential for expansion but can also go burst. Therefore, these funds are highly volatile and more susceptible to economic downturns & business cycles," Alok said.

Where should you invest?

According to SEBI regulations, multi-cap funds are required to allocate a minimum of 50% of their portfolio to smaller-cap stocks, which include small-caps and mid-caps. Multi-cap funds have outperformed flexi-cap funds in terms of average returns. On a one-year basis, multi-cap funds have delivered returns of 43.88%, compared to 39.81% for flexi-cap funds. Over a three-year period, multi-cap funds have generated returns of 21.45%, while flexi-cap funds have returned an average of 18.04%.

"Multicap fund is best suited for investors with a long-term horizon & high-risk tolerance. When choosing between these funds, investors should consider risk tolerance, investment goals, & time horizon to select the fund that aligns best with their financial objectives," Alok said.

“Flexi-cap funds, with their inherent flexibility, are being preferred as they can better handle risk-off sentiment or volatility by adjusting the mix of large, mid, and small caps,” Meenakshi Dawar, fund manager-equity investments, Nippon India Mutual Fund, said.

(Views expressed by the investment expert are their own.)