What is a flexi-cap fund, and how is it different from a multi-cap mutual fund?

A flexi-cap fund is an equity mutual fund that invests at least 65% of its assets in equity and equity-related instruments. It is an open-ended, dynamic equity scheme that gives fund managers the freedom to invest in companies across any market capitalisation. Depending on the market conditions, the fund manager can reallocate the portfolio among small-cap, medium-cap, and large-cap segments to offer improved returns and manage risks effectively.

Similarly, there are multi-cap funds that allocate at least 75% of their assets in equity and equity-related instruments, with a minimum of 25% allocated to each market cap segment. This ensures a broad diversification across different company sizes. 

In a multi-cap scheme, fund managers must ensure balanced investments in small-cap, mid-cap, and large-cap stocks to offer a diversified portfolio.

Both flexi and multi-cap funds have their own characteristics, risks and potential rewards, making the choice personal based on an individual’s investment goals, risk tolerance and market conditions. 

While both fund types invest across different market capitalisations, such as large-cap, mid-cap, and small-cap companies, there are key differences in their investment mandates that beginners should understand before investing.

Key differences

Multi-cap funds are required to have a minimum 25% allocation among small-cap, mid-cap, and large-cap stocks as per Securities and Exchange Board of India (SEBI) guidelines, whereas flexi-cap funds offer flexibility in investment across different capitalisations as they have no set allocations. 

Flexi-cap funds allow fund managers to select stocks and market capitalisations depending on market conditions and volatility. On the other hand, multi-cap funds limit the ability of the managers to change the allocations when needed.

Risk is relatively higher in multi-cap funds as compared to flexi-cap as there is an equal allocation among capitalisations, so losses from small-cap stocks can be higher, leading to increased risk. As the allocation in flexi-cap funds can change, these funds are usually stronger with less market risk. 

The tax implications of both funds are similar. Depending on how long you hold the investment, you may or may not have to pay taxes on the capital gains you made when selling multi-cap or flexi-cap funds. 

In both of the investment schemes, any gain made within a year is considered a short-term capital gain (STCG) and is taxed at 20% when you redeem/sell them. 

Further, any profit made through such funds over a year is known as long-term capital gains (LTCG) and is fully exempt up to ₹1.25 lakh in a financial year, after which the remaining will be taxed at 12.5% without any indexation benefits. 

Flexi-cap vs multi-cap funds

In the end, it all depends on your investment goals. Both funds can be equally risky in volatile market conditions. Besides, there are also several other factors that may impact your returns. 

Therefore, go for any of the two funds only if it is suitable for your investment portfolio and aligns with your future financial goals. Remember to read the terms and conditions of the funds, and if you can’t decide on your own, then take the help of a financial advisor.