Explainer: What is the difference between a multi cap and flexi cap fund?

The stock market categorizes listed companies into three groups based on market value: large-cap, mid-cap, and small-cap. Large-cap includes the top 100 companies, mid-cap covers those ranked 101 to 250, and small-cap comprises all other listed companies.

Mutual fund investors looking for diversification have two main options: flexi-cap and multi-cap funds. Both these options aim to invest across different market capitalizations but do so to varying degrees.

Three years ago, Sebi introduced a distinct category for multi-cap funds to ensure diversified exposure across large-cap, mid-cap, and small-cap stocks. Unlike flexi-cap funds, which also invest across market-cap segments but maintain a large-cap bias, multi-cap funds are mandated to allocate a minimum of 25% to each category.

What are these funds?

Multi cap funds: Around minimum 75% of total assets are invested in equity and equity related instruments. The new mandate of 25% each in large cap, mid cap, and small cap stocks came out in September 2020.

Flexi cap funds: A minimum of 65% of total assets are invested in equity and equity related instruments. The category was introduced in November 2020.

How are these funds different?

The key difference between multi-cap and flexi-cap funds lies in their market-cap allocations.

Multi cap funds have to invest minimum 25% each in large-, mid-, small-cap stocks. These funds are more aggressive and volatile than flexi-cap funds because of minimum allocation of 25% each in mid and small cap stocks.

Flexi cap funds have the freedom to invest across large-, mid-, and small-cap stocks. These funds are less volatile and aggressive than multi cap funds.

Performance

In the last one year, multi cap funds offered an average return of around 44.29% with the highest being offered by HSBC Multi Cap Fund which gave 56.56% return.

On the other hand, the flexi cap funds offered an average return of 38.08% in the last one year with the highest being offered by JM Flexicap Fund which gave 64.81% return.

Who should invest?

Flexi cap schemes are typically recommended to moderate investors to create wealth over a long period of time. Ideally, one should invest in these schemes with an investment horizon of five to seven years.