Although both are open-ended equity funds and invest in stocks across the market capitalisation, multi-caps must invest at least 25% in each of the small, medium, and large cap segments, but flexi-caps have no such limit.
Flexi-cap and multi-cap mutual funds are a type of open-ended equity fund and invest in stocks across the market capitalisation. However, flexi-caps can invest up to 65 per cent of their total corpus in equities and equity-related instruments, whereas multi-caps can invest up to 75 per cent.
There is, though, a rider. The multi-cap funds must ensure a minimum investment of 25 per cent in each market segment—large, mid, and small caps—at all times. Flexi-caps have no such restrictions.
Equity funds need to have a 65 per cent allocation in equities to enjoy equity taxation. So, in a flexi-cap, fund managers have more freedom to play with the remaining 35 per cent of the corpus. For example, they can move the 35 per cent asset in debt to minimise loss when the market tanks.
Likewise, if there is an opportunity in a particular pocket, such as a small cap, they can increase the allocation in that segment to boost returns. In a multi-cap, however, fund managers have lesser room to play in debt since it is 25 per cent.
Flexi-cap funds are free to choose the ratio between the three segments, thus offering them more flexibility to invest in foreign markets and further diversify, although it is not a prerequisite.
Hence, flexi-caps have more freedom when it comes to asset allocation compared to multi-caps. It can be a major advantage because flexi-caps could increase or decrease their share in a particular segment based on its performance and market condition at any given time.
In contrast, multi-caps can invest more in equities and equities-related instruments at 75 per cent of their total assets but must maintain the 25-per cent minimum limit in each segment.
Since multi-caps don’t have much flexibility like flexi-caps, they tend to rely more on large-cap assets for stability, with a relatively smaller share in small and mid-caps.
While multi-cap funds also enjoy relative stability because of their asset diversification, they could still be at risk if the market tanks or the large-cap assets retreat.
On the other hand, flexi-caps may have a better chance to withstand market pressure because of their flexibility or freedom to increase or decrease the fund ratio in each segment according to the need.
The Securities and Exchange Board of India (Sebi) rules require the funds to maintain their minimum and maximum investment targets. Sebi introduced the flexi-cap category on November 6, 2020.
Interestingly, despite their differences, they also share several similarities.
Both funds are ideal for investors with a long-term goal of at least five to seven years of a waiting period. Both schemes focus on different industry segments for long-term capital appreciation while providing modest caution against an unexpected decline in asset value or high market volatility.
Although both funds typically track the NIFTY 500 TRI and the NIFTY 50 TRI, flexi-cap funds can be conservative and face similar market risks.
Conversely, multi-cap funds could be risky if the portfolio relies more on mid-cap and small-cap assets to boost growth. In addition, a prolonged economic slowdown could negatively impact the growth of both flexi-cap and multi-cap funds.