Multi-cap or flexi-cap mutual funds: Where to invest in this market?
These are one of the most popular and biggest equity fund categories in the mutual fund industry.
Conventional wisdom suggests that when equity markets are hovering around their highs, a safer way to invest in equities is to diversify across sectors and stocks. Two types of mutual funds help you do that; multi-cap and flexi-cap funds.
Both invest across various market capitalisations — large-cap, mid-cap, and small-cap stocks.
These are some of the most popular and biggest equity fund categories in the mutual fund industry. In terms of inflows, flexi-cap funds have received Rs 72,248 crore net investments since the launch of the category in January 2021, while multi-cap funds have seen net inflows of Rs 88,856 crore during that same period.
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 end=August, while there are 26 multi-cap funds with an AUM of Rs 1.73 lakh crore.
Let’s take a look at the categories in depth.
Multi-cap versus flexi-cap: who has done better?
As a category, multi-cap funds, on average, have delivered returns of 43.88 per cent and 21.45 per cent on a one-year and three-year basis. This easily beats the performance of flexi-cap category, which has given 39.81 per cent and 18.04 per cent average returns over the same period, respectively.
The construction of multi-cap funds, which is in part due to regulatory constraints, has led to the outperformance over flexi-cap funds. As per SEBI (Securities and Exchange Board of India) regulations, multi-cap funds need to have a minimum of 50 per cent in smaller-cap stocks — small-caps and mid-caps.
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As per ACE MF data till end-August, the multi-cap fund category had an average 39.57 per cent allocation to large-cap stocks, 26.08 per cent to mid-cap stocks and 29.08 per cent to small-cap stocks.
On the other hand, flexi-cap funds had 62.83 percent exposure to large-cap stocks, 15.29 per cent in mid-cap stocks and 11.35 per cent in small-cap stocks.
How higher allocation to smaller-cap stocks have helped multi-cap funds? It’s the returns of the stocks in these market capitalisations.
Data shows that Nifty 100 Total Return Index (TRI) is up 32.82 per cent on a year basis. Compared to this, Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI are up 46.60 per cent and 51.69 per cent, respectively, during the same period.
Multi-cap or flexi-cap: Which is riskier right now?
Data indicates that the Nifty 50 price-to-earnings (PE) ratio is close to its long-term average, while the price-to-earnings (PE) ratios for mid and small-cap segments are above their historical averages.
When comparing multi-cap and flexi-cap funds in terms of risk, the risk level depends largely on how the fund manager allocates the investments.
Flexi-cap funds do not have any mandated allocation requirements and can dynamically adjust their investments across large-cap, mid-cap, and small-cap stocks based on market conditions. If the fund manager decides to invest heavily in small-cap or mid-cap stocks, the risk could be higher. However, in times of market uncertainty, the manager could choose to increase exposure to large-cap stocks to reduce volatility.
“Multi-cap funds seem riskier than flexi-cap funds in the current market conditions because of the mandatory exposure to more volatile mid- and small-cap stocks. Flexi-cap funds can adjust and focus on more stable large-cap companies,” said Viral Bhatt, Founder, Money Mantra.
How multi-cap and flexi-cap funds differ?
Multi-cap funds have been in existence for years now. However, in September 2020, the capital markets regulator, the SEBI introduced new norms for asset-allocation rules for multi-cap funds, mandating at least 25 per cent allocation each in large-cap, mid-cap, and small-cap stocks.
This was done as most multi-cap funds had become a proxy to large-cap funds with heavy allocation to the large-cap stocks.
Then in November 2020, SEBI launched a new category called flexi-cap, where such funds can invest a minimum of 65 per cent of their assets in equities, but without any restrictions on how much they can invest in large-cap, mid-cap, or small-cap stocks.
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Most funds moved to the flexi-cap category, with just a few funds choosing to stay in the restrictive multi-cap category.
However, over the years, the multi-cap fund category has seen a slew of scheme launches.
Multi-cap and flexi-cap funds: what should be investors’ approach?
Two tips to choose the right fund for you.
Understand your risk appetite
Investors with a lower risk appetite or nearing their financial goals may prefer flexi-cap funds for their dynamic allocation.
Look at the time horizon
Investors with a long-term horizon and a higher risk appetite could opt for multi-cap funds, as mid- and small-cap stocks may outperform in the long run, despite current volatility.
“Regularly monitor market conditions and consider portfolio rebalancing or switching funds if the market trends indicate prolonged instability in the mid-cap and small-cap segments,” said Bhatt.