Multi Cap vs Flexi Cap: Where Should You Invest?

When deciding where to invest in mutual funds, many investors often face a common dilemma: multi cap mutual funds or flexi cap mutual funds? Both categories offer the advantage of diversification across various market capitalisations, but they differ in terms of flexibility and fund management strategies. Understanding the differences between the two can help you make an informed investment decision. In this article, we will compare multi cap and flexi cap mutual funds, examine their performance potential, and help you decide which option aligns best with your financial goals. We will also explore the CAGR meaning and its importance in evaluating mutual fund returns.

What are multi cap mutual funds?

Multi cap mutual funds are equity mutual funds that invest across companies of different market capitalisations: large-cap, mid-cap, and small-cap. According to SEBI (Securities and Exchange Board of India) guidelines, multi cap funds must allocate a minimum of 25% each to large-cap, mid-cap, and small-cap stocks. This fixed allocation ensures that the fund is diversified across different types of companies, offering both growth and stability.

What are flexi cap mutual funds?

Flexi cap mutual funds, on the other hand, provide the fund manager with complete flexibility to invest in companies of any market capitalisation without any restrictions. Unlike multi cap funds, there is no mandated minimum allocation for large-cap, mid-cap, or small-cap stocks. This means that the fund manager can adjust the portfolio dynamically based on market conditions and opportunities, offering greater flexibility in stock selection.

Key differences between multi cap and flexi cap mutual funds

1. Investment Flexibility

• Multi Cap Mutual Funds: These funds have a fixed allocation of at least 25% to each large-cap, mid-cap, and small-cap stocks. While this ensures diversification, it limits the fund manager’s ability to adapt to market changes.
  

• Flexi Cap Mutual Funds: These funds offer complete flexibility, allowing the fund manager to allocate assets based on market trends and opportunities. The manager can invest in any proportion across large-cap, mid-cap, or small-cap stocks depending on where the best opportunities lie.

2. Risk and Return Potential

• Multi Cap Mutual Funds: Due to the mandated allocation to large-cap stocks, multi cap funds tend to be more stable and less risky than pure mid-cap or small-cap funds. However, the fixed allocation to mid-cap and small-cap stocks also introduces some level of risk, as these companies are more volatile than large-cap stocks.
  

• Flexi Cap Mutual Funds: The flexibility of these funds allows the fund manager to increase exposure to higher-risk, higher-reward stocks when market conditions are favourable. This means that flexi cap funds may offer better growth potential in a bullish market but could also carry higher risk during downturns.

3. Portfolio Management

• Multi Cap Mutual Funds: These funds follow a more structured approach due to the fixed allocation across different market capitalisations. The portfolio remains balanced, with exposure to all market segments, providing a mix of stability and growth.
  

• Flexi Cap Mutual Funds: Fund managers have the freedom to allocate the portfolio as they see fit, leading to potentially higher returns during favourable market conditions. However, the lack of structure can result in higher risk if the fund manager’s decisions do not align with market trends.

4. Market Adaptability

• Multi Cap Mutual Funds: The fixed allocation makes these funds less adaptable to changing market conditions. For example, if small-cap stocks are underperforming, the fund must still maintain a 25% allocation to them, which could drag down overall returns.
  

• Flexi Cap Mutual Funds: These funds are more adaptable to market changes. If small-cap or mid-cap stocks are underperforming, the fund manager can reduce their allocation and increase exposure to more stable large-cap stocks or vice versa.

5. Investor Profile

• Multi Cap Mutual Funds: These funds are suitable for investors looking for a balanced approach with moderate risk and diversification across all market segments. They are ideal for investors who prefer a structured investment strategy and are willing to accept some level of risk for potential growth.
  

• Flexi Cap Mutual Funds: These funds are suitable for investors with a higher risk appetite who are comfortable with the fund manager’s discretion in stock selection. Flexi cap funds are ideal for investors seeking higher returns and who trust the fund manager’s ability to navigate market volatility.

CAGR Meaning and its Importance in Mutual Funds

The term CAGR stands for Compound Annual Growth Rate. It is one of the most commonly used metrics to evaluate the performance of mutual funds over a specified period. CAGR represents the rate at which an investment grows annually over time, assuming the profits are reinvested. It provides a more accurate picture of an investment’s performance compared to simple average returns because it takes compounding into account.

For instance, if a mutual fund reports a CAGR of 12% over five years, it means that the investment has grown at an average rate of 12% per year over that period, compounded annually.

CAGR is an essential tool for investors when comparing the performance of multi cap and flexi cap mutual funds. It helps you understand how efficiently a fund has grown over time and allows you to make more informed decisions when choosing between different funds.

Which one should you choose: Multi cap or Flexi cap?

The choice between multi cap mutual funds and flexi cap mutual funds depends on your investment goals, risk tolerance, and market outlook.

• Multi Cap Mutual Funds: If you are looking for a balanced approach with stable returns and moderate risk, multi cap funds may be a better choice. The fixed allocation ensures that your portfolio remains diversified across different market segments, offering both stability and growth potential.
  
  

• Flexi Cap Mutual Funds: If you have a higher risk tolerance and are looking for potentially higher returns, flexi cap funds may be more suitable. The flexibility provided to the fund manager can lead to better performance in favourable market conditions, but it also comes with higher risk.

Conclusion

Both multi cap mutual funds and flexi cap mutual funds offer unique advantages and risks. Multi cap funds provide a structured and balanced investment approach, while flexi cap funds offer flexibility and the potential for higher returns. The right choice depends on your investment objectives and risk appetite.

Remember to consider the CAGR meaning when comparing fund performance, as it provides a more accurate reflection of how well a fund has grown over time. Ultimately, whether you choose a multi cap or flexi cap fund, it is essential to ensure that the fund aligns with your financial goals and investment horizon.