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How to choose between Multi cap funds and Flexi cap funds?
What is a Multicap fund?
Multi-cap funds are diversified equity funds that invest in stocks of companies with different market capitalizations.
The investments are done in varying proportions such that a minimum of 25% of funds are invested, each in large-, mid and small-cap segments.
Multicap Funds, in order to meet their investment objective, have the flexibility to straddle across market cap and sectors and spot capital appreciation opportunities to generate risk-adjusted returns to the investors.
For whom is a Multi cap fund better suited?
- For not-so-aggressive investors, they are relatively less risky compared to pure mid-cap or small-cap funds.
- Investor, who has a long-term financial goal in mind like early retirement, children's education, and building a home.
- For investors who want to reap the potential growth opportunities of midcap and small-cap funds without taking on the commensurate risk.
What is a Flexi Cap Fund?
A Flexi-cap fund where the fund management team has complete freedom to invest in companies of different sizes, i.e., across market capitalization segments, depending on where it expects maximum gains, without the threshold mandatory limit of 25% as in the case of multi-cap funds.
This inherent ability to diversify portfolios across sectors, and investment styles provide a value proposition for both first-time investors as well as seasoned investors looking to build and diversify equity-oriented portfolios.
This freedom to change allocation across market caps provides the benefit of "active management" to the investors as the job of stock selection is left completely to the fund manager, which is the idea of investing in a mutual fund. These unique features of Flexi cap funds help mitigate risk, lower volatility and create superior returns over the medium to long term on a risk-adjusted basis.
Flexi Cap funds were recently introduced by SEBI in November 2020. According to AMFI data, as of September 30, 2021, the average net asset value under the management of Flexi Cap funds is INR 2,13,143.84 crore.
For whom is the Flexi Cap Fund better suited?
It is suitable for those types of investors who are seeking:
- Long-term capital growth ( high returns) with a horizon of at least 3-5 years
- Diversifying their equity portfolio
- These investors should also be ready for the possibility of moderate losses in their investments in the interim period.
What is the difference between a Multi cap fund vs. Flexi cap fund?
1. Multi-cap funds are required to invest at least 25% each in large-, mid and small-cap segments.
On the other hand, Flexi-cap funds can invest at least 65% of the total assets in equity investments without any defined limits in terms of the exposure they should take to large-, mid- or small-cap segments.
2. In the case of multi-cap funds, managers still have 25% elbow room to give the portfolio an edge by increasing exposure to the segment they believe will do well. However, it takes away their ability to reduce exposure to a segment expected to do poorly, thus making the fund more stringent in terms of market cap exposure.
On the other hand, a Flexi-cap fund manager has a lot more freedom to make investment decisions across sectors and more active management of the portfolio.
Whether you decide to invest in a multi-cap or Flexi-cap fund, it is important to choose based on the fund manager’s long-term consistent performance and your individual investment goal, risk appetite, experience, knowledge, and preferences.