Ask Morningstar: Choosing between multi and flexi cap funds

By Larissa Fernand |  22-04-22 | 

I get confused between multi-cap and flexi-cap funds. What is the difference? Can you help pick a right one?

Both are diversified equity funds, the difference being in their market cap exposure.

Multi-cap funds must have a minimum 25% of the portfolio allocated to small-cap stocks, 25% to mid-cap stocks and 25% to large-cap stocks. This need not be in the exact proportion. A fund could have a 50% allocation to large-cap stocks, but will ensure that the allocation to mid and small caps are 25% each. Alternatively, a fund could have a 40% allocation to mid-cap stocks, a 35% allocation to large caps and a 25% allocation to small caps. The point being that once 25% of the portfolio is allocated to the respective market caps, the fund manager has complete leeway over and above that minimum mandated allocation.

To make it simple to recollect, view multi-cap funds as those that follow a 25-25-25 rule. While flexi-cap funds offer the fund managers complete flexibility as to where they choose to invest. They can focus on any market cap and move dynamically between the three without any restriction.

When it comes to volatility, the investor will be taking chances either way.

If a flexi-cap fund has a very significant allocation to small caps and that segment of the market gets hit, the fund’s performance will falter. But the multi-cap fund which has a relatively lower 25% exposure to small caps will be able to take it on the chin.

On the other hand, if the flexi-cap fund pulled completely out of small caps before they dipped and moved into large caps, its performance will be impacted positively. But the multi-cap fund with its mandated exposure of 25% will be lagging behind. But should a rally in small caps catch everyone by surprise, the multi-cap fund is already well positioned, the flexi-cap would have missed out.

Having said all that, a generalization would be that you can expect more volatility from a multi-cap fund as it will always have a minimum of 50% allocation to mid and small caps. They have nowhere to run when the market is pounding smaller stocks.

As of March 2022, the flexi-cap category maintained an average exposure of 68.7% to large caps, while the multi-cap category had an average exposure of 42.36% towards large caps.

Some guidelines on how to arrive at the decision:

  • Make a call about which type of fund to opt for after you look at your entire portfolio. If you already have individual small- and mid-cap funds, then you could probably do away with the multi-cap option.
  • If you are looking for a conscious allocation across the three market caps, then opt for a multi-cap fund.
  • If you want an opportunistic strategy where the fund manager gets complete discretion as to where to invest based on his/her conviction, then a flexi-cap will fit the bill. But bear in mind that the agility of the flexi-cap fund manager will have a strong role to play. The go-anywhere strategy will rest upon where the fund manager sees optimal value. Manager’s calls could go rather awry. The average 1-year return of the flexi-cap category was 23%, while that of the multi-cap category was 31% (as on April 20, 2022).

When it comes to analysing funds, Melwyn Santarita, analyst on the fund research team, shares some pointers:

  • Look at performance over specified periods, not just the latest chart toppers.
  • Be aware of the portfolio style. Some funds have growth bias, others a value style or growth at a reasonable price (GARP). For instance, Kotak Flexi Cap has been consistently plying a growth centric approach, on the other hand HDFC Flexi Cap runs with a value bent. Both these funds are highly rated by our analysts, but will perform very differently in similar market conditions.
  • A few flexi-cap funds also have global exposure as a diversification feature, such as Parag Parikh Flexi Cap Fund.
  • Finally, see how they fit in with your overall portfolio.

Funds our analysts have reviewed:

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.


Articles authored by LARISSA FERNAND
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