Imagine visiting a local grocery market where vendors sell fruits and vegetables at different prices. During the shopping spree, you find two vendors selling potatoes -- one has only potatoes available in his store. In contrast, the other has both potatoes and tomatoes available in one place but says you need to buy tomatoes with potatoes whether you need them or not. How will you determine from which store you should buy potatoes? Does it make sense to assume that the store that sells only potatoes does so without any condition on the minimum quantity to be purchased?
This everyday situation is analogous to the mindset of different investors who may find it challenging to pick different types of equity mutual funds based on the underlying stocks they invest in. Indeed, equity-oriented mutual funds should be an essential part of your investment portfolio to achieve the long-term goal of wealth creation. But if you look at their sub-categories, which include multi cap and flexi cap funds, you may find it tough to make an informed investment decision at once.
Wondering how to proceed further? It’s time to understand the more nuanced differences between multi cap and flexi cap funds.
Understanding Multi Cap Funds in Detail
A multi cap fund is an open-ended equity mutual fund for which it is mandatory to hold a portfolio across mid-cap, large-cap, and small-cap companies, hence the name. As per SEBI’s regulation, these funds must invest at least 75% of their total assets in equities in the following ratio:
● Minimum 25% in mid-cap companies
● Minimum 25% in small-cap companies
● Minimum 25% in large-cap companies
This equity allocation is to be maintained regardless of the market dynamics. It may allow investors like you to benefit from the stability of large-cap companies along with the return potential of the other two types of companies.
What are Flexi Cap Funds?
Unlike a multi cap fund, a flexi cap mutual fund is an open-ended equity scheme which is allowed to invest across all three types of companies classified in market capitalisation.
Further, there is no restriction w.r.t minimum investment in large, mid and small caps like the multi-cap funds. This is the reason that a fund manager handling a flexi cap fund can benefit from higher flexibility and explore investment opportunities across market caps.
SEBI Mandates: The Fulcrum of Multi Cap Vs. Flexi Cap Fund Comparison
The classification of mutual funds into flexi cap funds originated from 2020 SEBI Circular
As the circular says, the minimum investments in equities and equity-related instruments in multi cap funds must be 75%. The point of confusion is quite apparent, as well as the investment objectives of both these fund types are similar, and both invest in stocks across market capitalisations.
On the other hand, a new category of flexi cap fund was created under equity schemes to provide more flexibility to the mutual funds, as per
SEBI’s circular for flexi cap fund introduction.
Wondering which one is best for you? Let the bottom line help you with that.
The Bottom Line
As in the potato seller example, the right investment decision need not be solely based on multi cap fund vs flexi cap fund comparison but also on your financial goals. In simple words, what you need should determine where to invest at last. Ultimately, your capital, risk-taking capacity, and knowledge about different types of equity funds will help build a growing investment portfolio.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.