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Decoding Flexi Cap vs Multi Cap Funds: Strategy, risk and suitability

Flexi Cap vs Multi Cap Fund: Despite ongoing volatility in the equity markets, investor interest in mutual funds remains robust. However, a clear shift in investment preferences is emerging. Following significant corrections in the small-cap and mid-cap segments, a growing number of investors are reallocating their portfolios towards large-cap, Flexi Cap and Multi Cap funds—categories that predominantly invest in companies with larger market capitalisations. Market analysts suggest that in times of heightened uncertainty, Flexi Cap and Multi Cap Funds may offer more stability and strategic advantage. Yet, a key question persists among investors: Which is the better choice—Flexi Cap or Multi Cap Funds? While both fund types provide broad diversification, they differ notably in terms of investment structure and portfolio strategy. Key Differences in Fund Structure Flexi Cap mutual funds are frequently compared to Multi Cap funds, given that both invest in equities and equity-related instruments across various market capitalisations. However, a key structural distinction sets the two categories apart. Flexi Cap Funds mandate a minimum allocation of 65 per cent of their total assets to equities and equity-related instruments. In comparison, Multi Cap Funds are required to allocate at least 75 per cent of their corpus to equities. Another significant difference lies in the portfolio allocation strategy. Flexi Cap fund managers have complete discretion to invest across large-cap, mid-cap and small-cap stocks, allowing for a dynamic and flexible asset allocation approach. Conversely, Multi Cap fund managers must maintain a minimum investment of 25 per cent each in large-cap, mid-cap and small-cap segments, resulting in a more regimented and rule-based allocation structure. Flexibility Reduces Risk Flexi Cap funds are generally considered to be less risky compared to Multi Cap funds. Umeshkumar Mehta, CIO at Samco Mutual Fund, explains that Flexi Cap funds offer a dynamic approach, allowing fund managers to reduce exposure to large-cap, mid-cap or small-cap stocks when valuations become expensive. Unlike Multi Cap funds, Flexi Cap funds are not required to maintain a strict 25 per cent allocation in each market cap category (large, mid, small). This gives fund managers greater flexibility to adjust allocations based on market conditions. He further added that due to this flexibility, fund managers can shift towards safer market cap segments when valuations are high or during a market correction. This is one of the reasons why the overall risk level in Flexi Cap funds tends to be slightly lower. Choosing Based on Stability According to Mehta, in the current global market environment marked by heightened uncertainty, portfolios with a greater allocation to large-cap and mid-cap stocks are better positioned to deliver stability. Large-cap stocks offer resilience and consistency, while mid-cap stocks provide moderate growth potential. Given this backdrop, Flexi Cap Funds may be more appropriate for new investors, as they allow fund managers to tilt the portfolio towards relatively stable segments. Conversely, investors seeking uniform exposure across all market capitalisations may find Multi Cap Funds more suitable, as these funds mandate a minimum allocation to each of the large-cap, mid-cap and small-cap segments, ensuring balanced diversification. Time Horizon Matters A.K. Nigam, Director at BPN Fincap, notes that Flexi Cap Funds are well-suited for investors with a short- to medium-term investment horizon, typically ranging from zero to five years. These funds offer portfolio flexibility to navigate market volatility and are generally structured to deliver moderate returns. While the core allocation tends to favour large-cap stocks, they also include selective exposure to mid-cap and small-cap segments. Nigam further highlights that Multi Cap Funds are more appropriate for long-term investors, with an investment horizon of at least five to seven years. Owing to their mandated exposure to mid-cap and small-cap stocks, these funds carry higher risk but also present the potential for enhanced returns. They are most suitable for investors with a higher risk tolerance who seek long-term capital appreciation. Aligning Risk and Goals For investors with a high risk appetite but limited exposure to equities, Multi Cap Funds may present a more suitable option, as they offer diversified exposure across all market capitalisations regardless of prevailing market conditions. Conversely, investors with moderate risk tolerance seeking equity participation may find Flexi Cap Funds more aligned with their investment objectives. Mehta recommends that individuals with a higher risk appetite consider diversified equity funds such as Flexi Cap or Multi Cap Funds, which invest across a broad spectrum of stocks, including large-cap companies. These funds actively rotate allocations among sectors and market segments in response to changing market dynamics. As such, Mehta emphasises the importance of remaining invested for at least one full market cycle to realise the potential benefits. Given their structure and investment approach, these funds are generally more appropriate for long-term investment horizons.