Flexi cap and multi cap funds may look similar because both invest across large, mid and small cap companies. The key difference lies in how this exposure is managed. A multi cap fund must maintain a certain minimum exposure each in large, mid and small cap stocks, while a flexi cap fund can adjust freely adjust its portfolio mix across these segments based on its strategy and market conditions. This difference can affect the fund’s composition and risk.
This article explains the differences between these mutual fund categories in detail to help investors assess whether one, or both, may suit their needs.
Table of Contents
What are multi cap mutual funds?
A multi cap fund is a type of equity fund that invests large cap, mid cap as well as small cap companies. The fund must invest at least 25% of its portfolio to each market capitalization category.
Large cap companies are the top 100 listed companies in the country’s major stock market indices. These are typically industry leaders with a track record of consistent performance. Mid cap companies are ranked between 101-250 on the stock market index. Small cap companies are those ranked 250 and beyond. By investing in companies of various sizes, multi cap funds seek to combine the significant long-term growth potential of small cap and mid cap companies with the relative stability of large cap firms.
Read Also: Why should you consider investing in a multi-cap fund?
What are flexi cap mutual funds?
Like multi cap funds, flexi cap funds can also invest in large, mid and small cap companies. However, while multi cap funds must ensure a 25% allocation to each, flexi cap funds do not have to comply with any minimum allocation requirements. Flexi cap funds must invest at least 65% of their portfolios in equities, but are free to distribute investments across large, mid and small cap stocks as per their investment strategy and market conditions.
For instance, during volatility, they may increase the weightage of large cap stocks to add relative stability to the portfolio. When the market is primed for growth, they may increase the mid cap and small cap segments of the portfolio.
Read Also: Understanding Flexi Cap Mutual Funds
Key features of flexi cap funds and multi cap funds
Whether you are planning to follow a flexi cap and multi cap fund investment strategy or invest in one of them at a time, you must know the key features of these schemes.
• Risk-to-reward ratio: Both multi cap funds and flexi cap funds fall in the high-risk category on the riskometer. However, the risk-to-reward ratio of flexi cap funds is relatively better than multi cap funds because flexi cap funds are more flexible and can tap into an arising investment opportunity by allocating more assets to it. Multi cap funds can follow a similar strategy, but in a limited capacity, as they must maintain a minimum of 25% asset allocation across market caps.
• Market conditions: Multi cap funds may have a relatively better return potential than flexi cap funds in a bull market phase. Inversely, flexi cap funds may usually perform better than multi cap funds in a bear market phase. This is yet another reason why you must consider investing in both flexi cap funds and multi cap funds.
• Comparison with other equity schemes: Both multi cap funds and flexi cap funds can provide relatively better return potential than pure large-cap funds and large and mid-cap funds. They are also relatively less risky than pure mid-cap and pure small-cap funds. And since one of them performs better in bull runs and the other in bear runs, it is advisable to follow a concurrent flexi cap and multi cap fund investment strategy.
• Volatility: Flexi cap funds are usually less volatile than multi cap funds. This is because the volatility factor usually comes from investing in mid-cap and small-cap companies in emerging sectors. While flexi funds can drop their asset allocations in these segments, multi cap funds must maintain the 25% asset allocation mandated by SEBI irrespective of market conditions.
SEBI mandates and introduction of flexi cap funds
Before 2020, multi cap funds could invest across large-, mid- and small-cap companies without maintaining a minimum allocation to each segment. In September 2020, SEBI revised the category to ensure that multi cap funds stayed true to their label, requiring meaningful exposure to all three market-cap segments.
While this gave multi cap funds a more clearly defined structure, it also reduced the fund manager’s freedom to shift allocations. In November 2020, SEBI introduced flexi cap funds as a separate category. These funds retained the flexibility to move across market capitalisations while maintaining the required overall equity exposure.
The change created two distinct approaches: multi cap funds provide defined exposure to all three market-cap segments, while flexi cap funds offer a dynamically managed market-cap mix.
Major differences between flexi cap funds and multi cap funds?
Multi cap and flexi cap funds vary in important ways, includ Here’s a look at the key differences:
| Criteria | Multi cap funds | Flexi cap funds |
| Equity exposure | Must invest at least 75% of total assets in equity and equity-related instruments. | Must invest at least 65% of total assets in equity and equity-related instruments. |
| Market-cap allocation | Must invest at least 25% each in large cap, mid cap and small cap companies. | Can invest across large, mid and small cap companies, with no minimum allocation prescribed for any individual segment. |
| Mid- and small-cap exposure | At least 50% of the portfolio must collectively remain invested in mid and small cap companies. | No minimum mid or small cap exposure is required. The allocation depends on the fund manager’s strategy. |
| Flexibility | Relatively limited because the minimum allocation to each market cap segment must be maintained. | Greater flexibility to change allocations across market caps based on strategy, valuations and market conditions. |
| Risk characteristics | The mandatory mid and small cap exposure may make the portfolio more sensitive to volatility in these segments. | Should one invest in both flexi cap and multi cap funds? Investing in both may make sense when each fund has a distinct role in the portfolio. A multi cap fund provides defined exposure to large cap, mid cap and small cap companies, while a flexi cap fund allows the fund manager to change this mix as opportunities evolve. Before investing in both, consider: Portfolio overlap: Check whether the funds hold many of the same companies. High overlap may add another scheme without providing meaningful diversification. Combined market cap exposure: A multi cap fund already invests at least 50% in mid cap and small cap companies. Adding a flexi cap fund with similar exposure may increase concentration in these segments. Investment strategies: The combination may be more meaningful when the funds follow different portfolio construction or stock selection approaches. Portfolio simplicity: If one fund already provides the desired market cap exposure and investment approach, adding another may be unnecessary. The decision should therefore depend on how the two portfolios complement each other—not simply on owning funds from both categories. |
| Room outside equity | Up to 25% of total assets may be allocated outside equity, subject to the scheme mandate. | Up to 35% of total assets may be allocated outside equity, subject to the scheme mandate. |
| Suitable for | Investors seeking defined exposure to all three market-cap segments and comfortable with the mandatory mid- and small-cap allocation. | Investors comfortable allowing the fund manager to decide and change the market-cap mix. |
Should one invest in both flexi cap and multi cap funds?
Investing in both may be suitable if each fund can play a distinct role in the portfolio. Before investing in both, consider:
- Portfolio overlap: Check whether the funds hold many of the same companies. High overlap may add another scheme without providing meaningful diversification.
- Combined market cap exposure: A multi cap fund already invests at least 50% in mid cap and small cap companies. Adding a flexi cap fund with similar exposure may increase concentration in these segments.
- Investment strategies: The combination may be more meaningful when the funds follow different portfolio construction or stock selection approaches.
- Portfolio simplicity: If one fund already provides the desired market cap exposure and investment approach, adding another may be unnecessary.
The decision should therefore depend on how the two portfolios complement each other, not simply on owning funds from both categories.
Flexi cap vs multi cap funds: Which is more suitable for you?
Choosing between the two is less about which category is better and more about which portfolio structure suits your preferences, investment horizon and risk appetite.
When flexi cap funds may suit you
Flexi cap funds may suit investors who want to invest across companies of different sizes through a single fund and leave allocation decisions to the fund manager. They may also appeal to those who do not want to manage separate large cap, mid cap and small cap funds. Investors should have a long investment horizon and be comfortable with market fluctuations. They should also be comfortable with manager-led investment decision and a portfolio composition and risk profile over time.
When multi cap funds may suit you
Multi cap funds may suit investors who want continued participation across all three market cap segments. Because these funds must invest at least 25% each in large cap, mid cap and small cap companies, investors must also be comfortable with the volatility associated with sustained mid cap and small cap exposure.
Both categories carry equity market risk and are generally more suitable for investors with a long investment horizon and a very high risk appetite. The choice should ultimately reflect the investor’s goals, existing portfolio and ability to tolerate market fluctuations.
Conclusion
In conclusion, both flexi cap fund and multi cap fund schemes have their pros and cons and appeal to different types of investors. You can adopt the flexi cap and multi cap fund investment strategy if you have the resources. Or you can first add a flexi cap fund to your portfolio and add other investment products later based on your needs.
Invest with Bajaj AMC
Investors considering either of these categories may invest in Bajaj Finserv Flexi Cap Fund or Bajaj Finserv Multi Cap Fund. Bajaj Finserv Flexi Cap Fund follows a megatrends strategy, seeking opportunities arising from long-term structural shifts across economies and industries. Bajaj Finserv Multi Cap Fund follows a contrarian strategy, seeking overlooked businesses or fundamentally strong companies trading below their assessed intrinsic value. Investors can consider the fund that aligns with their investment goals, time horizon and risk appetite.
Visit the respective scheme pages to read about the funds and view their riskometer and other details.
FAQs
Which is better flexi-cap or multi-cap?
Different investors may prefer different schemes. A flexi cap fund may be more suitable for those who seek a portfolio that can flexibly adapt to market conditions. It may also suit those who want relative stability during volatile times through increased allocation to large cap stocks. However, those seeking guaranteed exposure to all three market capitalisations may prefer multi cap funds. Investors who want to minimise potential fund manager bias may also prefer multi cap funds to the dynamically managed flexi cap funds.
How to choose between flexi cap fund and multi cap fund?
Your investment horizon and risk tolerance will determine whether you choose a flexi-cap fund or a multi-cap fund. A multi-cap fund is an option if you are comfortable with the volatility that comes with a 50% exposure to mid and small-cap equities. Alternately, you might choose a flexi cap fund, which typically only allocates 25–30% of its assets to mid and small-size equities depending on market conditions.
What are the factors that determine the returns from these funds?
The returns of a mutual fund are influenced by a number of variables, including the investing strategy, the state of the market, and the fund manager’s experience. Equity funds that spread their holdings across various market capitalizations and industries include flexi-cap and multi-cap funds.
Which fund type typically has lower expense ratios?
Expense ratios vary across individual schemes and are not determined solely by whether a fund is a multi cap fund or a flexi cap fund. Some schemes in either category may have lower expense ratios than others.
