Mutual Funds have become a very popular investment option in India over the past few years due to the returns they generate. They have performed well compared to other investment options, and this is why investors choose to invest in mutual funds rather than any other asset. It assists in long-term wealth generation objectives by protecting us from inflation over time. Since mutual funds have become an integral part of our wealth management, it's tough to comprehend how to invest in them effectively to get our desired returns. There are many mutual fund categories available that can be chosen as per the financial goal. The most prominent mutual fund is the equity mutual fund, which has multiple subcategories, and two in particular are Flexi-Cap funds and Multi-Cap funds. Let’s read the article further on the Flexi Cap Vs Multi Cap, which is better, to achieve future financial goals.
Flexi-Cap Fund
A type of open-ended equity mutual fund that provides freedom to the fund manager to invest in all sizes of companies (small-cap, mid-cap, and large-cap) without any specific restriction is called Flexi Cap Funds. These funds need to be invested in a large portion of their assets (at least 65%) in equity, but they can dynamically adjust their portfolio across different market caps. These funds are open-ended, so investors can buy and sell units at any time they want.
Multi-Cap Fund
A type of equity mutual fund that invests in a mix of large-cap, mid-cap, and small-cap funds is called a multi-cap fund. It provides diversification by investing in companies of varying market capitalization to reduce the risk compared to other funds. These funds are generally considered suitable for investors with a moderately high-risk profile, with the primary objective of focusing on long-term growth with a diversified approach.
Key Difference between Flexi Cap and Multi Cap
Flexi Cap Vs Multi Cap: Market Cap Allocation
Flexi Cap and Multi Cap both invest in equities, but their market cap allocation is different. Multi-cap funds need to acquire 25% of their asset in each large cap, small cap, and mid cap, whereas flexi cap has no such restriction, and they can allocate their fund across all market caps as per the fund manager's discretion, which allows them to capitalize on opportunities in different market segments to generate higher returns.
Flexi Cap Vs Multi Cap: Flexibility
Flexibility is required, especially in equity funds, to adapt to changing market conditions to maximize return and mitigate risk. Flexi-cap funds are more flexible compared to multi-cap funds, as they have a mandated minimum investment of 25% each in large, mid, and small-cap stocks. Whereas, Flexi cap funds are not tied with any such restrictions and it can allocate across all market capitalization based on the fund managers’ discretion and market conditions.
Flexi Cap Vs Multi Cap: Volatility
Volatility is an integral part of any asset management. It refers to the degree to which the fund's value fluctuates on either side as per market conditions. Multi-cap funds are generally considered to be more volatile than flexi-cap funds due to their mandated asset allocation in small and mid-cap, which gets highly impacted by market fluctuation. Whereas, flexi cap funds are less volatile as they have no such restriction, which allows the manager to adjust exposure based on market conditions and potentially mitigate volatility.
Flexi Cap Vs Multi Cap: Risk and Return
Flexi-cap funds and multi-cap funds both offer different approaches to investing in the stock market to generate good returns over time. Flexi funds provide managers flexibility to allocate assets across various market capitalizations based on market conditions, which leads to higher returns but also higher risk. Whereas multi-cap funds are restricted from maintaining a minimum allocation of 25% in each cap, offering more sustainability, but potentially lower risk and return compared to a flexi fund.
Flexi Cap Vs Multi Cap: Tax Implications
Both the flexi-cap fund and the multi-cap fund are taxed the same as equity-oriented funds in India, which consist of Short Term Capital Gain (STCG) of 15% and Long Term Capital Gain (LTCG) of 10% on gains exceeding 1 lakh in a financial year. But there could be a subtle difference in taxation due to fund managers' flexibility in investment. For instance, a multi-cap fund might have a higher potential for short-term gain if the fund manager rebalances the portfolio frequently. However, if the market condition is good and the fund manager holds the positions to take advantage of the market condition to capitalize on them, the taxation of 10% may be lower than the tax on short-term gains. In short, both funds are taxed as equity investments, but the primary difference lies in the holding period and Rs. 1 lakh exemption.
Flexi Cap Vs Multi Cap: Equity Exposure
Equity exposure refers to the amount of money allocated to equities relative to the total portfolio value, which indicates both profits and losses due to the fluctuation in the market. Both multi-cap funds and flexicap funds differ in equity exposure and flexibility, as multi-cap funds are restricted to allocate a minimum of 25% to the large, mid, and small-cap stocks, which allows fund managers to dynamically adjust their investment across various capitalization bands based on market conditions. Whereas, flexi cap funds have relatively larger or smaller exposure to any market cap segments, which can reduce risk by increasing large-cap exposure or seeking opportunities by increasing small-cap exposure.
Conclusion
Mutual funds are always a good investment option to generate a high return on invested capital compared to other investment options. It offers various categories and subcategories to choose the best to meet financial future goals. These funds are safe and best as they are managed by highly skilled professional fund managers who have years of experience in managing portfolios. Flexi cap vs Multi cap, which is better, often depends on an individual's requirements, as both are good and have the capability to beat inflation and offer a good return over a long-term perspective. Multi-cap funds are good and offer a more balanced and diversified approach, which provides sustainability but also lower risk and returns. On the flip side, Flexi caps provide greater flexibility and potential for higher return, but increased risk due to dynamic allocation.
