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Multi-Cap vs Flexi-Cap Funds: Understanding the Differences

Posted on 10-May-2024

6 min read

Learn about the key differences between multi-cap vs flexi-cap funds with Shriram AMC. Choose the right fund according to your investment goals and risk profile.

Table of Content

In the ever-evolving world of mutual funds, choosing the right investment option can feel overwhelming. Two popular choices for investors seeking diversification across market capitalizations are Multi-Cap Funds and Flexi-Cap Funds. But what exactly sets them apart? 


Understanding the difference between Multi-Cap Funds vs Flexi-Cap Funds is crucial to making an informed decision that aligns with your risk tolerance and financial goals. This blog will unveil the key distinctions between these two fund types, empowering you to pick the investment vehicle that best propels your portfolio towards long-term success. So, buckle up and get ready to navigate the exciting world of Multi-Cap and Flexi-Cap Funds!

What is a Multi-Cap Fund?

Multi-cap funds are a type of mutual fund that invests in companies of all sizes, from large, established corporations (large-cap) to smaller, growing businesses (mid-cap and small-cap). This diversification aims to balance risk and reward. Large-cap stocks offer stability, while smaller companies have the potential for higher growth, but also greater volatility. By including a mix of these, multi-cap funds seek to provide a well-rounded portfolio suitable for investors with moderate risk tolerance and a long-term investment horizon.

What is a Flexi-Cap Fund?

Flexi-cap funds, similar to multi-cap funds, invest across the market capitalization spectrum. However, unlike multi-cap funds with mandated allocations, flexi-cap funds offer the fund manager more flexibility. They can dynamically adjust their holdings across large, mid, and small-cap companies based on their growth potential, giving them the ability to potentially capture opportunities in any market segment. This flexibility fosters diversification and aims to achieve capital appreciation over the long term.

Difference Between Multi-Cap and Flexi-Cap Funds

In the quest to understand the nuances of mutual fund investments, comparing multi-cap and flexi-cap funds is essential. Here's a concise table that encapsulates the key differences, aiding in your decision-making process.
Aspect Multi-cap funds Flexi-cap funds
Investment Strategy Fixed allocation across large, mid, and small-cap stocks. No fixed allocation; flexible investment across all market caps.
Market Cap Exposure Diversified evenly across different market caps. Allocation can vary greatly based on the fund manager's discretion.
Risk Profile Generally moderate due to balanced diversification. Can be higher due to flexibility in capital allocation.
Fund Manager's Role Follows a structured investment approach. Plays a crucial role; decisions are based on market trends.
Suitability for Investors Ideal for those seeking a balanced approach with moderate risk. Suitable for investors comfortable with a higher degree of risk and reliance on the fund manager's strategy.
Market Responsiveness Less responsive to immediate market fluctuations due to its diversified nature. Highly responsive, offering potential for higher returns but with increased risk.
Primary Objective Aims for steady growth with lower volatility. Seeks to maximize returns through.


Factors to Consider When Choosing Between Multi-Cap and Flexi-Cap Funds

In the decision-making process of multi-cap vs flexi-cap funds, it's important to weigh various factors to determine which aligns best with your investment profile. Here's a comparison table highlighting the key aspects to consider when choosing between multi-cap funds and flexi-cap funds:
Factor Multi-Cap Funds Flexi-Cap Funds
Investment Objective Ideal for steady growth and moderate risk, catering to investors seeking balanced financial growth. Preferable for those targeting aggressive growth, willing to embrace higher risk for potentially greater returns.
Market Understanding More suited for investors with a basic or moderate understanding of the stock market, given their structured nature. Requires a deeper market understanding, as performance is closely tied to the fund manager's response to market dynamics.
Investment Tenure Better for shorter investment horizons due to their relative stability and balanced approach. More appropriate for long-term investments, as their volatility is more manageable over extended periods.
Risk Profile Suitable for investors with a lower risk tolerance, offering a more predictable investment path. Aligns with investors who are comfortable with significant market fluctuations and have a higher risk tolerance.
 

The Importance of Diversification in Investment Portfolios

Investment diversification is like savouring a buffet—you don’t load up on one dish; you try a mix. Similar to diverse investments, it balances risk and reward, increasing chances of reaching financial goals. Given below are some of the diversification in investment portfolios: 
Factors Multi-cap funds Flexi-cap funds


Characteristics


These funds aim to maintain a well-distributed portfolio, including large-cap, mid-cap, and small-cap companies.


The fund manager has the flexibility to invest in large-cap, mid-cap, and small-cap companies based on prevailing market conditions.

 


Investment Strategy


Multi-cap funds adopt a balanced investment approach, typically allocating funds to large-cap, mid-cap, and small-cap stocks in predetermined proportions. This strategy combines stability and growth elements.


The investment approach of flexi-cap funds is adaptable. The fund manager adjusts the portfolio based on their market perception, allowing the fund to shift from a large-cap focus to a mid-cap or small-cap orientation, as seen in any flexi-cap fund.

 


Benefits


Investors in multi-cap funds enjoy a well-rounded exposure to companies of different sizes, providing a blend of stability and growth. These funds are particularly suitable for those seeking diversification across sectors and market capitalizations.


Flexi-cap funds provide versatility in asset allocation, enabling them to potentially seize opportunities in different market segments.

 

Conclusion

In conclusion, choosing between multi-cap and flexi-cap funds depends on your risk tolerance and investment goals.

•    Multi-cap funds offer a balanced approach with a predetermined allocation across market capitalizations, suitable for moderate risk profiles and long-term goals.

•    Flexi-cap funds provide more flexibility for the fund manager to adjust holdings based on market conditions, potentially leading to higher returns but also greater risk. They are ideal for investors comfortable with a more active approach and a longer investment horizon.

FAQs

Here are some of the commonly asked questions on flexi-cap and multi-cap funds:

1.    How do market conditions affect multi-cap and flexi-cap funds?

Market conditions significantly influence both fund types. Multi-cap funds offer diversified exposure, which can cushion against market downturns. Flexi-cap funds, with their adaptable strategy, can capitalise on market trends, but they also face higher risks during market instability.

2.    Can an investor's risk profile evolve to favour one type of fund over the other? 

Absolutely. As investors gain more experience or as their financial situations change, their risk tolerance can shift. Initially, an investor might prefer the relative safety of multi-cap funds. Still, over time, as they become more market-savvy and financially secure, they might lean towards the higher risk-reward potential of flexi-cap funds.

3.    Does the diversification in multi-cap funds guarantee protection against market downturns compared to flexi-cap funds? 

While diversification in multi-cap funds can offer a buffer against market downturns due to the spread of investments across various market caps, it doesn't guarantee complete protection. Similarly, flexi-cap funds, despite their concentrated positions, might manoeuvre better in a downturn if the fund manager strategically reallocates assets. However, both fund types are subject to market risks, and their performance can be influenced by overall market conditions.

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