How do Flexi-Cap and Multi-Cap funds compare? Know their difference


Flexible-cap and multi-cap mutual funds are a type of open-end equity fund and invest in stocks of all market capitalizations. However, flexi-caps can invest up to 65% of their total corpus in equities and equity-related instruments, while multi-caps can invest up to 75%.

There is, however, a rider. Multi-cap funds must ensure a minimum investment of 25% in each market segment (large, mid and small caps) at all times. Flexi-caps have no such restrictions.

Why is the corpus limit difference?

Equity funds must have a 65% equity allocation to qualify for equity taxation. Thus, in a flexi-cap, fund managers have more freedom to play with the remaining 35% of the corpus. For example, they can move the 35% of leveraged assets to minimize losses when the market crashes.

Likewise, if there is an opportunity in a particular pocket, such as a small cap, they can increase the allocation in that segment to increase returns. In a multi-cap, however, fund managers have less leeway on debt since it is 25%.

Flexi-Caps benefit from more flexibility than multi-caps

Flexi-cap funds are free to choose the ratio between the three segments, giving them more flexibility to invest in foreign markets and further diversify, although this is not a prerequisite.

Therefore, flexi-caps have more freedom in asset allocation than multi-caps. This can be a major advantage as flexi-caps could increase or decrease their share in a particular segment depending on its performance and the state of the market at any given time.

In contrast, multi-caps can further invest in equities and equity-related instruments at 75% of their total assets, but must maintain the minimum limit of 25% in each segment.

Since multi-caps don’t have a lot of flexibility like flexi-caps, they tend to rely more on large-cap assets for stability, with a relatively lower share in small- and mid-caps .

Risks and safety nets

Although multi-cap funds also enjoy relative stability due to the diversification of their assets, they could still be at risk if the market crashes or large-cap assets pull back.

On the other hand, flexi-caps may have a better chance of withstanding market pressure due to their flexibility or freedom to increase or decrease the funds ratio in each segment as needed.

Securities and Exchange Board of India (Sebi) rules require funds to maintain their minimum and maximum investment targets. Sebi introduced the flexi-cap category on November 6, 2020.

What are the similarities

Interestingly, despite their differences, they also share several similarities.
Both funds are ideal for investors with a long-term goal of at least a five to seven year waiting period. Both systems focus on different industry segments for long-term capital appreciation while providing modest prudence against unexpected declines in asset values ​​or high market volatility.

Although both funds generally track the NIFTY 500 TRI and NIFTY 50 TRI, flexi-cap funds can be conservative and face similar market risks.

Conversely, multi-cap funds could be risky if the portfolio relies more on mid- and small-cap assets to drive growth. In addition, a prolonged economic downturn could have a negative impact on the growth of flexi-cap and multi-cap funds.


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