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The mutual fund market is an attractive investment avenue for investors, given the variety of schemes and plans it offers. Some mutual funds offer to diversify funds into different assets to balance risks and returns, which makes them more appealing.
Of the various kinds of mutual funds, multi and flexi-cap funds are two popular equity funds known for the diversity they offer. In today’s article, let us learn in detail the meaning of flexi-cap mutual funds and multi-cap funds, along with their features, benefits and differences.
What are multi-cap funds?
Multi-cap funds, as the term suggests, hold stocks of multiple companies with varied market capitalisations. The fund manager collects money from investors and invests them into equity stocks of large-cap, mid-cap and small-cap companies.
The speciality of these funds is that they have a requirement by the Securities and Exchange Board of India (SEBI) to invest at least 25% of the fund in each market-cap category. Hence, at least 75% of the fund will be invested in equities, and the rest can be invested in other securities to hedge risks.
Features of multi-cap funds
- At least 25% of the fund must be invested in small-cap, large-cap and mid-cap funds.
- At least 75% of the fund’s investment must focus on equities.
- Dividends earned on multi-cap funds are taxable at the investor’s income tax rate. Short-term capital gains are taxable at 15%, and long-term capital gains of more than ₹1 lakhs are taxable at 10%.
Benefits and risks of multi-cap funds
Multi-cap funds require a specific allocation to each category, making the portfolio well-diversified. The risk and return in such funds are balanced well, due to which the market volatility is handled.
However, the rule about allocating a specific percentage to each cap restricts fund managers from using their expertise to allocate funds in various tools to maximise profits. Besides, finding suitable stocks to allocate 25% of the fund in medium and small-cap categories may not be easy. Allocating funds to under-performing companies to meet the minimum allocation rule may increase the portfolio’s risk exposure.
What are flexi-cap funds?
Flexi-cap funds are similar to multi-cap funds, with a twist. The objective here, too, is to diversify the investment into companies with different market capitalisations. However, there is no requirement by the SEBI to invest 25% in large, small and mid-cap firms.
The investment here is more flexible, and the fund manager can decide how and where to invest the funds. The entire fund can be invested in companies having similar capitalisation, for example, in large-cap funds. Otherwise, the fund manager can choose to invest them in companies with varied capitalisations, with no specific rule on how much to invest.
The fund manager has the authority to decide and alter the investment based on the market conditions, funds available, the company’s performance, etc.
Features of flexi-cap funds
- The fund manager must invest at least 65% in equities and related instruments.
- There is no asset allocation rule by SEBI, hence, the fund manager can decide the spread of the fund between different market capitalisations.
- They follow the same tax rules as multi-cap funds, with dividends being taxable at the investor’s income tax rate. Short-term capital gains are liable for taxes at 15%, and long-term capital gains are taxable at 10% for gains over ₹1 lakh.
Benefits and risks flexi-cap funds
Flexi-cap funds do not have allocation restrictions. The fund manager can rebalance the portfolio to provide investors with maximum returns and minimum risks across different market situations.
However, the investor’s portfolio may be affected by the fund manager’s decisions, if they do not go as expected. Since there is no rule on allocation, maintaining the balance may become a challenge, exposing the portfolio to higher risks. These funds also require the fund manager to be more active in noticing every market event and rebalancing the portfolio, because of which the fund’s fees may be more expensive.
The differences between flexi-cap and multi-cap funds
| Flexi-cap | Multi-cap |
| Has no rule on asset allocation percentages | Invests at least 25% each in large, mid and small-cap stocks |
| Invests at least 65% in equities and equity-based instruments | Invests at least 5% in equities and equity-based instruments |
| The fund manager has the freedom to rebalance the portfolio as needed | Fund managers must rebalance in accordance with the asset allocation rule |
Bottomline
Flexi mutual funds and multi-cap mutual funds are two equity-oriented mutual fund plans, that offer a diverse portfolio to investors.
If you are an investor looking at moderate risks, flexi-cap funds may be more suitable. Since they do not have the condition to invest largely in one category, the fund manager can shuffle the allocations as needed to minimise risks. However, the returns on such funds will be moderate, too.
If you are an investor willing to take higher risks in the long term, multi-cap funds may suit you better. Mutli-cap funds’ performance is noticed to be slightly better in the long run, making it an ideal choice for those looking at diversity and high returns.
So, assess your financial objectives and choose wisely. Happy investing!
FAQs
A hybrid fund invests in debts and equities to manage the investor’s risk and return, while a flexi-cap fund is an equity-based fund. A major portion of the fund is invested in equities, across different caps, which can be altered to meet the objectives and minimise risks.
Large-cap funds are said to work the best in the long run. Since stocks of companies with large market cap are already at their peak, the further growth takes time. Hence, they are beneficial in the long run.
It is noticed that flexi-cap funds work well in the medium run, which is approximately 5 to 7 years.
Flexi-cap funds are equity funds, where the SEBI mandates allocating 65% to equities. However, the remaining 35% can be allocated across different kinds of debt instruments.
Some popular and well-performing multi-cap funds are Quant Active Fund, Nippon India Multi-Cap Fund, Mahindra Manulife Multi-Cap Fund, ICICI Prudential Multi-Cap Fund,
Invesco India Multi-Cap Fund, etc.