 "Mutual Funds")
Even though small-cap funds continued to be the most sought-after in August, multi-cap, mid-cap, and Flexi Cap Funds also received substantial flows from retail investors.
“Investors continued to hold their interest in Small cap funds with Rs.4265 crore of inflows, maintaining the run rate above the Rs 4000 crore mark for the third month in a row. Multicap funds with inflows at Rs 3422 crore, Midcap funds at Rs.2512 crore and Flexi cap funds at Rs.2193 crore were the other three categories gaining substantial flows from investors,” according to Gopal Kavalireddi, Vice President, of Research at FYERS.
What is the difference between multi-cap and flexi-cap funds?
The stock market consists of various listed companies that are broadly categorised into three groups based on their market value. The first group is large-cap, which comprises the top 100 companies with the highest market value. The second group is mid-cap, comprising companies ranked between 101 and 250 in terms of market value. The third group is small-cap, which includes all the remaining listed companies.
Mutual fund investors seeking diversification can prick from two major baskets — flexi-cap and multi-cap funds.
Both funds operate with the intent to invest across market capitalisations, albeit to different degrees.
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Multi-cap funds must allocate at least 25 per cent of their AUM, each to large, mid, and small-cap stocks. The remaining 25% can be invested in companies, debt instruments, or kept as cash. The flexi-cap category does not have such restrictions on investing in large, mid, or small-cap stocks. Here, the fund manager can change the allocation among the different categories of companies based on their research and market outlook. For example, a flexi-cap fund manager could allocate 50% of the fund to large-cap, 20% to small-cap, 10% to mid-cap, and the remaining 20% to cash and bonds.
Thus, over the last 2-3 years, many funds moved to the flexi-cap category, while a few remained in multi-cap.
Thus, over the last 2-3 years, many funds moved to the flexi-cap category, while a few remained in multi-cap.
The key difference between the two is that Multi-caps have a more balanced and disciplined approach where minimum allocation is pre-defined. In the case of flexi caps, investors will have to rely on the "market cap allocation ability" of the fund manager.
"Multi-cap funds adopt a well-rounded investment approach, typically maintaining a predetermined balance in their allocation to large-cap, mid-cap, and small-cap stocks. This allocation strategy aims to offer a combination of stability and growth potential. As the name suggests, flexi cap funds grant investors the freedom to invest in companies across all sizes and sectors. They are not obliged to invest in all market segments, allowing them to focus their portfolios on segments that offer the best opportunities, as per the fund manager," explained Adhil Shetty, CEO of Bankbazaar.
Flexicap and Multicap funds’ benchmark structure:
Nifty 500 Index on average holds a higher weight in Largecaps (70%+); followed by Midcaps (around 10% to 15%) ; and in Smallcaps (5% to 10%) or thereabouts.
Most of the actively managed Flexicap funds also hold a similar exposure, that is higher exposure in largecaps, but with a variation on the stock selection and allocation part.
Most of the actively managed Flexicap funds also hold a similar exposure, that is higher exposure in largecaps, but with a variation on the stock selection and allocation part.
In the case of the Nifty 500 Multicap Index, it carries 50% exposure to Largecaps and 25% exposure each in Midcaps and Smallcaps.
" As compared to the Nifty 500 index, the Nifty 500 Multicap index has a higher exposure to Mid and smallcaps Flexicap funds are benchmarked against Nifty 500 index TRI (or an equivalent in BSE) and Multicap funds are benchmarked against Nifty 500 Multicap 50:25:25 Index TRI (here the ratio represents allocation into Largecap : Midcap: Smallcap)," said Sriram BKR, Senior Investment Strategist at Geojit Financial Services.
Risk:
"Between multi-cap and flexi-cap funds, multi-caps are riskier and have higher return potential, since they have a mandated allocation of 25% each to small caps and mid-caps respectively, unlike flexi cap funds that are free to determine their allocation percentage to each market cap segment," said Mayank Bhatnagar, Chief Operating Officer, FinEdge.
Most flexi-cap funds today maintain a 70-75% allocation to blue chip stocks, and so are just large-cap funds with a “twist” in a sense.
"Over the long run, flexi cap funds can provide returns that are in sync with large-cap indices – so an 11% CAGR would be a reasonable assumption. Multi cap funds have the potential to deliver slightly higher long-term returns, so one can assume around 13% CAGR from both categories," added Bhatnagar.
Volatility
Volatility
Since Flexicap funds hold more of large-cap stocks, they tend to have lower volatility, especially during market falls or drawdowns. On the other hand, as Multicap funds hold higher exposure to the Mid & Smallcap segment, they come with higher volatility on most occasions, particularly during market declines.
"Sample instances when Nifty 500 Multicap Index saw higher drawdown (call it underperformed too) Vs Nifty 500 Index: Dec-2011 ; Sep-Oct 2013 ; 2018 till 2020 most of the period," said Sriram BKR.
Average Marketcap exposure of Active Flexicap & Multicap Funds – as of Jul’23 & Aug’23 portfolios, according to Geojit Financial Services
Average Marketcap exposure of Active Flexicap & Multicap Funds – as of Jul’23 & Aug’23 portfolios, according to Geojit Financial Services
Performance
The last 1-2 year's trends show that multi-cap funds have generated returns of 15-20 per cent whereas flexi-cap have provided an average 15-17 per cent annual return. In some top-ranked funds, the returns have been much higher while some funds have underperformed as well. When we compare the returns of top-ranked multi and flexicap funds, there is a difference of about 5-7 percentage points. However, these trends may change in future and you must keep that into consideration when you decide to invest in mutual funds.
Trailing returns as per August 2023, according to Geojit Financial Services
"The performance of multi-cap funds and flexi-cap shows a stark difference due to differences in their underlying assets. AMFI's data shows that over the past year, while flexi-cap funds have risen 15%, multi-cap funds have gone up 20%, resulting in higher investor interest in the latter category. However, a careful look indicates that the higher returns of multi-asset funds are mainly on the back of an extended bull run in the small and midcap stocks. These stocks are highly volatile. On the other hand, flexicap funds tend to bend more to large-cap stocks, which are comparatively more stable," said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.
Some of the top-performing multicap funds are Quant, Nippon, ICICI, Mahindra etc. The top-performing Flexicap funds are HDFC, SBI Flexicap, JM Flexicap, Franklin India, Quant, Edelweiss, and Kotak Flexi cap fund etc.
Who should invest in multi-cap and flexi-cap funds?
Investors looking for diversification should opt for the funds."
If one were to look an actively managed diversified fund covering Large, Mid and Small-cap space of the listed universe, but with relatively lesser volatility, they can consider Flexicap funds, as they hold more of Largecaps, followed by Midcaps and Smallcaps. Those investors looking for a similar diversified fund, but with higher exposure to the mid- and smallcap universe, then they can look at choosing among the Multicap funds," said Sriraram BKR.
Who should invest in multi-cap and flexi-cap funds?
Investors looking for diversification should opt for the funds."
If one were to look an actively managed diversified fund covering Large, Mid and Small-cap space of the listed universe, but with relatively lesser volatility, they can consider Flexicap funds, as they hold more of Largecaps, followed by Midcaps and Smallcaps. Those investors looking for a similar diversified fund, but with higher exposure to the mid- and smallcap universe, then they can look at choosing among the Multicap funds," said Sriraram BKR.
At the benchmark level, Nifty 500 Multicap index had delivered higher returns than Nifty 500 index over longer time durations.
How to decide between the two?
. Investing in a multi-cap or a flexi-cap fund depends on an investor's overall portfolio. However, most financial experts believe Multi-cap funds are a better bet due to the forced mandate of maintaining a diversified portfolio.
Suppose the investor already has a comparatively heavy allocation to large-caps (through ETFs, index funds, or actively managed large-cap schemes). In that case, it is better to choose multi-cap funds for diversification, according to Kulkarni. However, starting from a flexi-cap would be a good idea for a first-time investor to build meaningful exposure across all market capitalisation stocks.
"If you prefer a well-balanced approach, a Multi-Cap fund may be a suitable choice. On the other hand, if you are at ease with taking on more risk to seek potentially higher returns, a Flexi Cap Fund, known for its adaptability to market conditions, could be a more appropriate option," said Shetty.
"Investors must make themselves aware of the non-linear nature of equity returns (be it flexi cap, multi-cap or any other category) – meaning that you may well have a couple of years of negative returns followed by a year of supernormal growth. Also, these are expected long-term investment returns - not speculative short-term returns based on market timing. It is always advisable to invest in equity funds systematically, and with clearly defined financial goals in mind. Ad hoc, returns-centric investing can completely derail your investment journey and lead to losses in your portfolio, so be sure to start off with the right expectations before you invest in any of these two funds," advised Bhatnagar.
