In the realm of mutual funds, diversification reigns supreme. Two prominent contenders offering diversification across market capitalisations are Flexi Cap Funds and Multi Cap Funds. But how do you choose between them? This blog delves into the core characteristics, investment strategies, and suitability factors of Flexi Cap and Multi Cap funds, empowering you to make informed investment decisions for your portfolio.
What is market capitalisation?
Market capitalisation (Market Cap) refers to the total market value of a company's outstanding shares. It's calculated by multiplying the current share price by the total number of shares outstanding. Companies are generally categorised into three segments based on market capitalisation:
- Large Caps: These are the biggest and most established companies in the market.
- Mid Caps: These are medium-sized companies with significant growth potential.
- Small Caps: These are the smallest companies in the market, often offering high-risk, high-reward opportunities.
What are flexi cap funds?
Flexi Cap funds, as the name suggests, offer flexibility in asset allocation across market capitalizations. Unlike Multi Cap funds with predefined allocation mandates, Flexi Cap funds empower the fund manager to dynamically adjust the investment mix between Large, Mid, and Small Cap stocks based on their judgement of market conditions and potential opportunities.
- Manager's Discretion: The fund manager has the freedom to invest across the entire market capitalization spectrum, from large, established companies to promising small ventures.
- Potential for Higher Returns: By strategically tilting the portfolio towards a specific market cap segment based on market trends, Flexi Cap funds have the potential to generate higher returns compared to Multi Cap funds.
- Higher Risk: The flexibility in asset allocation also translates into potentially higher risk, as the fund manager's calls on market movements can significantly impact returns.
What are multi-cap funds?
Multi-cap funds, on the other hand, follow a more balanced and predetermined investment approach. These funds typically invest in a pre-defined ratio across Large, Mid, and Small-cap stocks. This allocation strategy aims to achieve a balance between stability (offered by Large Caps) and growth potential (offered by Mid and Small Caps).
- Predefined Allocation: Multi Cap funds adhere to a pre-defined allocation mandate (e.g., 60% Large Cap, 25% Mid Cap, 15% Small Cap) as mandated by SEBI (Securities and Exchange Board of India) regulations.
- Moderate Risk-Reward Profile: The balanced investment approach across market caps generally translates into a moderate risk-reward profile. Multi Cap funds aim to offer steadier growth compared to Flexi Cap funds, with potentially lower volatility.
- Limited Upside Potential: Since the allocation is predetermined, Multi Cap funds might underperform Flexi Cap funds during strong bull runs in specific market segments, as they cannot fully capitalise on those opportunities.
Flexi-cap vs. multi-cap funds: which is the right one for you?
The ideal choice between Flexi Cap and Multi Cap funds hinges on your mutual fund investment goals, risk tolerance, and investment horizon:
- Flexi Cap Funds: A good fit for investors with a higher risk tolerance and a longer investment horizon who seek the potential for superior returns through dynamic asset allocation by the fund manager.
- Multi Cap Funds: A suitable option for investors seeking a balanced and diversified portfolio with moderate risk and a focus on steadier, long-term growth.
Additional factors to consider
- Fund Manager's Track Record: Research the fund manager's past performance and investment philosophy, especially for Flexi Cap funds, where the manager's discretion plays a crucial role.
- Expense Ratio: Compare the expense ratios of different Flexi Cap and Multi Cap funds. A lower expense ratio translates into higher returns for you.
- Overall Portfolio Mix: Consider how these funds fit within your overall asset allocation strategy. Both Flexi Cap and Multi Cap funds can contribute to diversification across market capitalisations.
Conclusion
Flexi Cap and Multi Cap funds offer distinct advantages, catering to different risk profiles and investment goals. By understanding their characteristics, risk-reward profiles, and suitability factors, you can make informed decisions to incorporate these valuable tools into your investment strategy. Remember, diversification is crucial for a well-rounded portfolio. Consider your investment goals and risk tolerance to choose the fund that best aligns with your financial objectives. Happy investing!
