Flexi-Cap Vs Multi-cap Funds: Which Category Should Investors Choose?
By Akhil Chugh
Date May 19, 2021
In past few months, SEBI has made 2 major announcements with regard to equity fund categories:
- September 2020: SEBI changed the allocation rule for multi cap funds. It made it mandatory for all multi-cap funds to have minimum 75% of investments in equities & equity-related instruments. And this 75% equity has to be allocated as follows:
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- Minimum 25% in large-cap companies
- Minimum 25% in mid-cap companies
- Minimum 25% in small-cap companies
(Large Cap companies are identified as the Top 100 stocks on the basis of market capitalisation. Mid caps as stocks from 101st to 250th and Small caps are stock 251st onwards.)
This was done by SEBI to make multi-cap funds more true-to-label. So, if an investor wanted exposure to all market caps (with minimum investment in all) via just a single fund, then multi-cap funds under the 25-25-25 rule may be suitable.
- November 2020: SEBI introduced a new category of equity funds – ‘Flexi Cap’ funds. As per the rule, funds in the flexi cap category need to invest a minimum of 65% of their portfolio in equity with no restriction in terms of market-cap allocation. Thus, flexi-cap funds are given complete flexibility in deciding their allocation among different market caps.
With flexi-cap funds, SEBI has brought back the multi-cap funds in the old avatar with a new name!
With these new rules, fund houses are given flexibility to re-categorize their erstwhile multicap schemes as flexicap schemes if they wanted to continue with their old style of investment. As a result, many schemes have recategorized themselves from Multi-cap to Flexi-cap funds like Kotak, Motilal Oswal, Aditya Birla Sun Life, Parag Parikh, etc
However, this change in name doesn’t really have any impact on your existing investments. The funds have changed their scheme name and category while maintaining the same investment objective, team and process.
Multi-cap Vs Flexi Cap: At a glance
Relative Performance of Top Flexi Cap Funds
Key Takeaways for Investors:
- If investors have the exposure to the erstwhile multi cap fund in their portfolio, then check which of the two categories the fund has chosen.
- The decision of the fund to switch to flexi cap category will mean that the fund intends to continue with its existing flexible portfolio strategy.
- However, if the fund chooses the new multi-cap regime, it would mean a change in risk & return profile of the fund. Since, fund portfolio will now have to align to the revised rules of minimum 25% exposure across large-cap, mid-caps & small-caps. If you already are invested in small and mid cap funds, your market cap allocation has become more risky. Investors need to see how staying put in multi-cap funds impacts their asset allocation and take a decision accordingly based on their risk profile.
Ideally choosing between a multi cap and a flexi fund should be guided by investor’s investment goals and risk and return expectations.
Net Brokers believes, if you are looking for pure diversification across market caps and are willing to take on the higher risk level of the mid and small caps then multi caps can be the right choice for you. On the other hand, if you are looking for a less rigid, more market driven addition to your overall portfolio then a flexi cap fund could be your choice of investment.
Having a long-term investment horizon is the ultimate key to success for investments in both multi cap and flexi cap funds.
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