Multi-cap funds vs flexi-cap funds: What are they, how to choose, factors to consider

Rather than investing in three separate mutual fund schemes to get exposure to large, mid, and small-cap stocks, you can do so with a single scheme – a multi-cap or a flexi-cap scheme. This article will explore what these schemes are, the returns they give, and which one to choose.

How to choose between multi-cap funds and flexi-cap funds

Before we get into the details of what multi-cap and flexi-cap funds are and the returns they give, we need to understand why we should invest in them. To answer that question, let us look at the performance of large-cap, mid-cap, and small-cap indices in the last ten years.

10-year performance of large-cap, mid-cap, and small-cap indices

10-year performance of large-cap, mid-cap, and small-cap indices

(Source: Nippon India MF)

Note: For large-cap, S&P BSE 100 TRI returns are considered. For mid-cap, S&P BSE Mid Cap TRI returns are considered. For small-cap, S&P BSE Small Cap TRI returns are considered.

As seen in the above table, during the 10-year period 2011-2020:

  • Large-caps (S&P BSE 100 Index) were the best performers in 4 years
  • Mid-caps (S&P BSE Mid Cap Index) were the best performers in 3 years
  • Small-caps (S&P BSE Small Cap Index) were the best performers in 3 years

However, as an investor, you never know whether large-caps, mid-caps, or small-caps will outperform next year. Hence, it makes sense for you to invest in mutual fund schemes that can give you exposure to stocks across the spectrum. Multi-cap and flexi-cap funds can provide you exposure to stocks across market capitalisation. So, let us understand the details of these mutual fund schemes.

What are multi-cap funds?

As per SEBI guidelines, a multi-cap mutual fund scheme is an open-ended equity scheme that invests a minimum of 75% of its total assets in equity and equity-related instruments across market capitalisation such that:

  • A minimum of 25% of its total assets are invested in equity and equity-related instruments of large-cap companies,
  • A minimum of 25% of its total assets are invested in equity and equity-related instruments of mid-cap companies, and
  • A minimum of 25% of its total assets are invested in equity and equity-related instruments of small-cap companies

So, a multi-cap fund can give you exposure to large, mid, and small-cap stocks (25% exposure in each category) through a single mutual fund scheme.

For example, the asset allocation of Invesco India Multicap Fund looks like this:

 asset allocation

(Source: Invesco Mutual Fund)

As seen in the above table, the fund will always have 75%-100% exposure to stocks. Within stocks, it will have a minimum of 25% exposure to each of the following: large-cap companies, mid-cap companies, and small-cap companies.

Related: Multi-asset allocation: Choosing between balanced advantage funds and multi-asset allocation funds

Benchmarks for multi-cap funds

Some multi-cap funds have the Nifty 500 Multicap 50:25:25 Index as the benchmark. The index represents the top 500 companies as per market capitalisation that are a part of the Nifty 500 Index. However, the Nifty 500 Multicap 50:25:25 Index has been designed in such a way that the weightage of large-cap companies is fixed at 50%, and that of mid-cap and small-cap companies at 25% each.

For example, multi-cap funds like Quant Active Fund, Invesco India Multicap Fund, etc., have the Nifty 500 Multicap 50:25:25 Index as the benchmark. The ICICI Prudential Multicap Fund has the Nifty 50 Index as the primary benchmark and the Nifty 500 Multicap 50:25:25 Index as the additional benchmark. The Principal Multi Cap Growth Fund has the Nifty 500 Index as the benchmark, whereas the Baroda Multi Cap Fund has the S&P BSE 200 Index as the benchmark.

What are flexi-cap funds?

As per SEBI guidelines, a flexi-cap mutual fund scheme is an open-ended dynamic equity scheme that invests a minimum of 65% of its total assets in equity and equity-related instruments across large, mid, and small-cap stocks.

So, just like a multi-cap fund, a flexi-cap fund can also give you exposure to large, mid, and small-cap stocks through a single mutual fund scheme. However, in a flexi-cap fund, the fund manager has the flexibility to decide how much is to be invested in large-caps, mid-caps, and small-caps, without any minimum investment requirement in each category. The investment in each category is managed dynamically, depending on the market situation.

Related: Large-caps or mid-caps? Tackling the slowdown conundrum

Axis Flexi Cap Fund: Asset Allocation

Axis Flexi Cap Fund: Asset Allocation

(Source: Axis Mutual Fund)

Note: The above asset allocation is as of 31 May 2021.

The above table shows that the Axis Flexi Cap has maximum exposure (88%) to large-caps with just 3% to small-caps.

Benchmarks for flexi-cap funds

Most flexi-cap funds have the Nifty 500 Index as the benchmark. The Nifty 500 Index represents the top 500 companies by market capitalisation. The top 100 large-cap companies, 150 mid-cap companies, and 250 small-cap companies are a part of the Nifty 500 Index. Flexi-cap schemes have the Nifty 500 Index as the benchmark because this index gives the Fund Manager the flexibility to choose from large, mid, and small-cap companies they would like to invest in.

For example, flexi-cap funds like Parag Parikh Flexi Cap Fund, PGIM Flexi Cap Fund, Canara Robeco Flexi Cap Fund, etc., have the Nifty 500 Index as the benchmark.

Related: The dos and don’ts with small-caps, mid-caps to get best returns

Differences between a multi-cap fund and a flexi-cap fund

Differences between a multi-cap fund and a flexi-cap fund

Why should you invest in multi-cap or flexi-cap funds?

When you invest in a multi-cap or flexi-cap fund, you get exposure to large-cap, mid-cap, and small-cap companies. Each of them has its own benefits.

chart

(Source: Invesco Mutual Fund)

As seen in the above image, large-caps can provide stability to your portfolio. Mid-caps can boost the returns of your portfolio. Small-caps, while they carry the highest risks, have the potential to give exponential returns in the long run.

Multi-cap and flexi-cap mutual fund scheme returns

Multi-cap mutual fund schemes

multi cap

Flexi-cap mutual fund schemes

flexi cap

(Source: Moneycontrol.com)

Note: The above returns are as of 9 August 2021. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year returns.

The above table shows that based on a 5-year return, the top 5 flexi-cap funds have given better returns than the top 5 multi-cap funds. The only exception is the top-performing multi-cap fund, i.e., Quant Active Fund, which has given the best returns of 23.52% CAGR over the last five years. The fund has also given the best 1-year returns of 84.51% and 3-year returns of 29.26% across all flexi-cap and multi-cap funds.

Choosing between multi-cap funds and flexi-cap funds

Multi-cap funds and flexi-cap funds can give you exposure to large, mid, and small-cap stocks with a single mutual fund scheme. However, when it comes to choosing between the two types of mutual fund schemes, it all depends on how much exposure you want to large, mid, and small-cap stocks. 

If you want a minimum of 25% exposure to each – large, mid, and small-cap stocks – you can choose to invest in a multi-cap mutual fund scheme. However, if you are okay with the fund manager choosing how much exposure to take towards large, mid, and small-cap stocks and manage it dynamically as per the market situation, you can choose to invest in a flexi-cap mutual fund scheme.

Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.

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