An efficient method to attain diversification is through the investment in multi-cap and flexi-cap funds, which allocate resources across different market capitalizations, encompassing large-cap, mid-cap, and small-cap equities.
Engaging in financial market investments, whether via stocks or mutual funds, necessitates thorough research and assessment. Conventional wisdom highlights the significance of diversification, particularly in times of market peaks or troughs. A practical approach to attaining diversification is through the investment in multi-cap and flexi-cap funds, which allocate resources across different market capitalizations, encompassing large-cap, mid-cap, and small-cap equities.
Multi-cap and flexi-cap funds represent two of the most prominent and favored categories of equity funds within the mutual fund sector. From January 2021 onwards, flexi-cap funds have garnered net investments totaling Rs 72,248 crore, whereas multi-cap funds have experienced net inflows amounting to Rs 88,856 crore during the same timeframe.
What are Flexi cap funds?
Flexicap funds are a type of equity mutual fund that possess the ability to invest across a range of market capitalizations, including large-cap, mid-cap, and small-cap stocks, without imposing strict constraints. This flexibility enables the fund manager to adjust the fund’s asset allocation in response to prevailing market conditions, thereby seizing potential investment opportunities and assessing valuations effectively.
According to Siddharth Alok, AVP Investments at Multi Ark Wealth-Epsilon Money, “Flexicap funds are designed to invest in companies of varying market capitalizations. Fund managers can adapt their allocations based on market dynamics and emerging opportunities. Currently, the average allocation consists of approximately 55% in large-cap stocks, 40% in small and mid-cap companies, with the remainder held in cash. This dynamic allocation approach positions these funds to potentially achieve strong returns over the medium to long term.”
Flexi-cap funds have become increasingly favored by individual investors, with a total of 39 schemes in this category amassing a collective Assets Under Management (AUM) of Rs 4.30 lakh crore. This positions flexi-cap funds as the second-largest category by asset size, following sectoral schemes.
As of the end of August, the capital market features 39 flexi-cap funds, which collectively manage assets totaling Rs 4.29 lakh crore. In addition, there are 26 multi-cap funds with an aggregate AUM of Rs 1.73 lakh crore.
Varun Goel, senior fund manager–equity at Mirae Asset Investment Managers (India), stated that increased diversification through the distribution of investments aids in balancing risk and reward for these funds. Historically, flexi-cap funds have demonstrated superior performance in volatile market conditions due to their ability to allocate investments across various sectors.
Multicap funds
Multicap equity funds offer investors the chance to invest in companies of varying sizes and across multiple sectors. This versatility allows fund managers to distribute investments among large, mid-cap, and small-cap companies in response to prevailing market conditions.
These funds provide access to all major sectors driving the growth of the Indian economy, making them a suitable investment option for a period of five years or longer. By choosing multi-cap funds, investors can avoid the necessity of acquiring multiple funds to achieve a thorough market exposure.
Regarding multi-cap funds, it is essential that they comply with a required allocation, designating at least 25% to each of the Large, Mid, and Small-cap categories. While these funds carry a higher risk profile, they also have the potential to perform well during bullish market conditions. Small-cap funds primarily target investments in companies that rank below the top 250 in terms of market capitalization. These firms are often in the early stages of development, presenting considerable growth opportunities, yet they also carry the risk of failure. Consequently, these funds exhibit high volatility and are more vulnerable to economic fluctuations and business cycles, as noted by Alok.
Where should you invest?
According to SEBI regulations, multi-cap funds are required to allocate a minimum of 50% of their portfolio to smaller-cap stocks, which include small-caps and mid-caps. Multi-cap funds have outperformed flexi-cap funds in terms of average returns. On a one-year basis, multi-cap funds have delivered returns of 43.88%, compared to 39.81% for flexi-cap funds. Over a three-year period, multi-cap funds have generated returns of 21.45%, while flexi-cap funds have returned an average of 18.04%.
A multicap fund is ideally suited for investors who possess a long-term investment perspective and a high tolerance for risk. In selecting among these funds, it is essential for investors to evaluate their risk appetite, investment objectives, and time frame to identify the fund that most closely aligns with their financial goals, according to Alok.
“Flexi-cap funds are increasingly favored due to their inherent adaptability, allowing them to navigate risk-averse sentiments or market volatility by varying the allocation among large, mid, and small-cap stocks,” stated Meenakshi Dawar, fund manager for equity investments at Nippon India Mutual Fund.
