Comparative analysis of Multicap funds and Flexi cap funds

Flexi cap mutual fund has always been a part of the mutual fund industry.

Officially though as a category it only came into existence in 2018 after SEBI’s re-categorization exercise.

Multicap funds in its new format came into existence only due to the changes in rules to its old format.

The new format came to be known as flexi cap mutual funds.

A flexi cap mutual fund and a multicap mutual fund are as related to one another as they are unrelated.

What is a Multicap mutual fund?

A multicap mutual fund is a mutual fund that would by mandate need to invest a minimum of:

25% in large cap stocks
25% in mid cap stocks
25% in small cap stocks

The remaining 25% can either be invested in debt, international equity, cash or any of the above caps or all.

In order to qualify as a multi cap mutual fund, a mutual fund needs to invest a minimum of 75% in domestic equity divided as described above.

Additional reading: Click Here to read about Equity Mutual Funds in detail

What is flexi cap mutual funds?

A flexi cap mutual fund needs a minimum of 65% investment in equities at all times.

There is no restriction with regards to caps or sectors.

There is no restriction with regards the remaining 35% as well.

The fund manager can invest the remaining 35% as per her wish in any of the following:

Domestic Equity
International Equity
Cash
Debt

What is imperative is that 65% at all times is invested in equities to qualify as a flexi cap fund.

Basically, a flexi cap fund is exactly what a multi cap fund used to be earlier before the new rules set in, the only change is in the name.

History of flexi cap and multicap mutual funds

Flexi cap mutual fund as a category only came into existence for some funds in late 2020 and early 2021 for the rest.

Same is the case for multi cap funds following the new mandate rules of 25% minimum investment into each large cap, mid cap and small caps.

For flexi cap mutual funds that were previously multicap funds, they have been so since 2018 after SEBI’s recategorization exercise.

Multicap funds on the other hand following the new mandate have been doing so since the latter half of 2020 for some and early 2021 for others.

Investment style of flexi cap and multicap mutual funds

Flexi cap mutual funds need a minimum of 65% investment into domestic equities at all times.

They have no restriction with regards to market caps.

Multicap mutual funds need a minimum 25% investment into each large caps, mid caps and small caps.

The fund manager is at liberty to invest the remaining 25% as per her choice.

Flexi cap mutual funds have less potential for higher upside as compared to multicap mutual funds but better downside protection.

They have a tendency to be less volatile compared to multicap mutual funds but this is to be expected considering the mandate they are to follow.

Should you invest in multicap and flexi cap mutual funds?

Multicap mutual funds need a minimum of 25% investment into each mid cap and small cap stocks.

This means 50% of the total portfolio at all times will be invested in mid and small cap stocks.

This makes the fund highly aggressive, volatile but at the same a candidate with potential for higher growth.

Therefore one needs a longer time horizon, ideally 7 years or more since both mid and small cap stocks go through various cycles and need a longer time period for their potential to materialize.

This does come with the caveat of the fund going through volatile phases which is unfortunately when most investors tend to redeem.

Flexi cap mutual funds need to invest a minimum of 65% into equities at all times with no market cap restrictions.

So even though it may seem flexi cap mutual funds are less volatile than multicap funds, this may not necessarily be the case.

A flexi cap mutual fund can function like a multicap fund but vice versa is not possible.

For eg. In the past Invesco Multicap fund and ITI Multicap fund historically had higher exposure to mid and small cap stocks compared to category average when the old mandate was still the rule.

These two funds have now been converted to a multicap fund with the new mandate.

PGIM Equity Diversified Fund was in the same boat but decided to remain as a flexi cap fund than convert to a multicap fund.

Additional reading: Click Here to read our complete review of PGIM Flexi cap fund

This clearly demonstrates that picking a category or a fund is not enough, you need to understand how it works and how to align it with your long term goals.

The worst case scenario is when you have both, a flexi cap mutual fund and a multicap mutual fund and they both undertake the same strategy which makes diversification a futile exercise.

Difference between flexi cap and multi cap mutual fund

A flexi cap fund needs a minimum of 65% investment in equity.	A multi cap fund needs a minimum of 75% investment in equity.

No compulsory investment in mid and small cap stocks	A multi cap fund needs to compulsorily invest a minimum of 25% each in mid and small cap stocks.

It can invest its complete portfolio into large cap stocks if needed.	It can invest only up to 50% of its complete portfolio in to large cap stocks at any given time.

Needs a lower minimum exposure to equity as compared to a multi cap fund.	Needs a higher minimum exposure to equity as compare to a flexi cap fund.

Multi cap mutual funds list

List of Multicap funds as on 1^st March 2021

Baroda Multicap

BNP Paribas Multicap

ICICI Pru Multicap

Invesco Multicap

ITI Multicap

Mahindra Manulife Multicap

Nippon Multicap

Principal Multicap

Quant Active Multicap

Sundaram Equity Multicap

Since 1^st March 2021, Aditya Birla Mutual Fund has already launched a multicap fund whereas Axis Mutual Fund, Kotak Mutual Fund and Mahindra Manulife Mutual Fund too plan to launch multicap funds sometime this year.

Performance of Multicap and Flexi cap mutual funds

Benchmark	Category	1 year %
S&P BSE 100 TRI	Large cap	56.91
S&P BSE 150 MidCap TRI	Mid cap	79.36
S&P BSE 250 SmallCap TRI	Small cap	101.90

The past 1 year everyone and everything has been impacted due to frequent lockdowns and the stock market has been no different.

With gradual openings across all fronts, large caps would have been expected to be at the forefront to reap the benefits of recovery but mid and small caps have surprised everyone.

In the short term the stock market makes little sense, in the long run it is very rewarding.

It is not a place where you earn money, it is a place where you create wealth.

Needless to say that multicap funds since their commencement on 1^st February 2021 with a higher exposure to mid and small cap stocks have done better than flexi cap mutual funds.

In the same vein though, flexi cap mutual funds have been able to better provide downside protection than multicap mutual funds.

The time period to compare the two is very limited and yet this short period is testament to how diversification will never go out of vogue.

Irrespective of which category you choose if indeed you have to make a choice between the two, the choice of fund category is not as important as understanding the underlying strategy of the fund you eventually invest in.

What category of fund you invest in is not as important as what strategy you invest in.

If you know what you are doing then chances of a favourable result goes up.

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