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March 1, 2024

Equity funds are popular investment options for many Indian investors looking to grow their money over the long term. Two categories of equity funds that are quite popular are multi-cap funds and flexi-cap funds. But which one should you choose for your portfolio? Here is an overview of both these fund types to help you decide.

The difference between multi-cap and flexi-cap funds

Multi-cap funds invest across large, mid and small cap companies without any limitation on the allocation to each market cap segment. They aim to diversify across market caps to manage risk. Flexi-cap funds are similar but have the flexibility to vary their allocation across market caps from 0 to 100% based on the fund manager’s view. So flexi-cap funds can go overweight or underweight on market caps compared to multi-cap funds which stay diversified.

Key factors to consider

Market Cap Allocation Freedom: Flexi-cap funds have higher flexibility on market cap allocation compared to multi-cap funds. This allows them to capitalize on opportunities in specific caps.

Style Consistency: Multi-cap funds tend to remain true to their diversified style. But flexi-cap funds may tilt towards a large cap or mid/small cap style based on market conditions.

Volatility: Flexi-cap funds may see higher volatility compared to multi-cap funds given their ability to take concentrated bets. Multi-caps tend to be more stable.

Returns Potential: Concentrated bets can aid outperformance in flexi-cap funds while multi-caps look for stable returns through diversification. But both aim to beat benchmarks over a market cycle.

Portfolio Role: Multi-cap funds suit core portfolio needs while flexi-cap funds are better suited as satellite funds given their flexibility.

Risk-Return Profile: Investors should assess their own risk appetite and return expectations before choosing between the two styles. Flexi-caps suit aggressive investors more.

Analyzing the fund manager style

Along with the category style, the individual fund manager’s investment style also impacts how they manage the fund. So analyze the manager’s style in terms of:

– Market cap preferences – do they focus on large caps or mid/small caps more?

– Investment approach – bottom up stock picking or top down allocation?

– Risk appetite – how aggressively do they manage the fund?

– Performance across market cycles – how consistent is their performance?

This will give insights into how they may manage the flexi-cap or multi-cap fund and their potential to generate returns.

Costs and taxation

Both fund types have similar expense ratios in the 1-2% range in India. Capital gains tax also applies equally, with equity funds enjoying some tax efficiency over debt funds. Costs and tax impact may not be a deciding factor between the two.

Conclusion

Flexi-cap funds are suitable for seasoned investors with higher risk appetites looking for outperformance opportunities. Multi-cap funds are ideal for novice investors focused on stability and diversification. Assess your own profile and portfolio needs before deciding between the two styles. A well-balanced portfolio can even utilize both fund types strategically.

Garth Gregory

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