Flexi Cap vs Multi Cap Funds: Which Is Better?

Investors today have a wide variety of equity mutual fund options, and two categories that often come into comparison are Flexi Cap and Multi Cap funds. Both offer diversified exposure to companies across different market capitalizations, but their asset allocation differs, making each suitable for different investor needs and market scenarios.

In this article, we will discuss the meaning and benefits of flexi cap funds and multi cap funds, their investment strategies, and flexi cap vs multi cap performance comparison, among other things.

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What Are Flexi Cap Funds?

Flexi-cap funds are equity mutual funds that allow the fund manager to invest in any market capitalization (Large, mid, small) without any restriction across each market cap. The allocation freedom helps fund managers mitigate risk in downturn and churn benefits in bullish markets by allocating funds to the right stocks. 

For example, the fund manager would allocate more funds into mid-cap and smallcap stocks in an uptrend, and the allocation of large-cap stocks will increase when the market is volatile/downtrend. As per Securities and Exchange Board of India (SEBI) rules, flexi cap funds must have at least 65% of their assets in equity and equity-related instruments.

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What Are Multi Cap Funds?

Multi-cap funds are equity mutual funds that invest in large-cap, mid-cap, and small cap companies. As per SEBI's new guidelines, Multi-cap funds must hold at least 75% of their assets in equity and equity-related instruments. As per the regulations, the only constraint is that the fund manager must allocate at least 25% of its assets to large-cap stocks, 25% to mid-cap stocks, and 25% to small cap stocks. 

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Major Differences Between Multi Cap And Flexi Cap Funds

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Multi Cap Vs Flexi Cap - Which Has Given Better Returns

Let's compare the past performance of Multi-Cap and flexi-cap Funds to determine which has given better returns.

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Multi Cap Funds

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Flexi Cap funds

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Looking at the above table data, it is clear that the Multi Cap Funds have outperformed the Flexi Cap Funds in the past few years.

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Should NRI Invest In Multi-Cap Or Flexi-Cap Funds?

Multi-Cap Funds may suit you if:

• You’re looking for a structured and balanced exposure across market caps.
• You prefer steady allocation to mid and small caps, regardless of market cycles, which can benefit during bull markets for these segments but may add risk during downturns.

Flexi-Cap Funds may be ideal if:

• You value flexibility and want the fund manager to adjust the portfolio to minimize risk in volatile markets or capitalize on large-cap stability during downturns.
• You’re looking for a dynamic investment that adjusts based on market outlook and conditions.

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How Should NRI Choose Mutual Funds?

Choosing the correct type of mutual fund can be a daunting task. A few essential points NRIs should keep in mind before choosing mutual funds are:

• Investment Objective: NRIs should first understand their investment's purpose, whether to accumulate wealth over the long term or earn passive income regularly. According to investment objectives, there are different classes of mutual funds, e.g., Index funds, debt mutual funds, equity mutual funds, growth funds, ELSS, liquid funds, etc.
• Time Horizon: Equity mutual funds can be a good option if the investment is for the long term, and if the investment is for a shorter duration, one should choose debt or liquid mutual funds over equity mutual funds. 
• Risk Tolerance: Choose funds that align with the risk tolerance. Debt mutual funds are suitable for conservative investors, whereas equity mutual funds are for aggressive investors.
• Passive or Active Fund: Another key metric is whether the fund is actively or passively managed. An active fund can outperform the benchmark index, whereas a passive fund typically replicates the underlying index and gives similar returns. 
• Liquidity: Liquidity refers to the ease with which a mutual fund can be bought and sold. Liquidity is different among various fund classes. An open-ended fund can be redeemed anytime, making it suitable for short-term investors, whereas a close-ended fund can be redeemed only during a predetermined time, making it advisable for long-term investors only. 
• Expense Ratio: The Expense Ratio is the annual fee charged for various costs, such as distribution and management fees. A fund with a low expense ratio can positively impact returns.
• Exit Load: The exit load is the fee charged during redemption. A fund with a higher exit load reduces the net return. Hence, choosing funds with no or minimal exit loads is a good option. In a few instances, funds with higher exit loads outperformed those with lower ones.
• SIP vs. LumpSum: NRIs can choose the SIP or LumpSum route. Under SIP, one has to invest regularly at fixed intervals. It also helps in rupee cost averaging. SIPs are best suited for volatile markets with long investment horizons. Meanwhile, under Lump Sum, one has to invest once, which works best in a bullish or low-volatility market and is suitable for those with higher disposable money.
• Past Performance: Look for funds with a consistent track record across market cycles (bull and bear markets). A fund that performs well consistently often reflects a solid investment strategy and resilience to market volatility.
• Taxation: Investing in a specific type of mutual fund like ELSS can reduce the tax liability of NRIs under section 80C of the Income Tax Act 1961 under the old tax regime. Equity and Debt mutual funds are taxed differently; hence, choose accordingly. Gains from mutual funds may be taxable in India and your country of residence, depending on the Double Taxation Avoidance Agreement (DTAA). NRI should ensure FACTA compliance if based in the US or Canada. 

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You can connect to one of our tax experts to learn more about NRI tax compliance.

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How Can iNRI Help?

Many NRIs want to invest in mutual funds but need an NRO/NRE account, and they are even worried about tax compliances when they invest in India. No need to worry; iNRI is the one-stop solution for all your problems. Through iNRI, an NRI can easily invest in the mutual fund market in India from the comforts of their homes and enjoy high returns from Indian markets. 

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Conclusion

As the saying goes, past performance does not guarantee future results. An NRI should choose funds that align with their Investment objectives. Multi-cap funds generally appeal to people with a higher risk appetite and long-term horizon, given their structured exposure to all market caps, which can lead to solid returns in bullish markets. Conversely, Flexi cap funds suit people with a balanced risk approach and value active fund management due to their flexibility and adaptations during various market conditions. 

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Frequently Asked Questions (FAQs): Flexi Cap Vs Multi Cap Funds: Which Is better?

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What is the difference between flexi-cap and multi-cap funds?

Flexi-cap funds have the flexibility to invest across all market caps without restrictions. In the case of multi-cap funds, the fund manager has to allocate 25% to each market cap (large, mid, and small).

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Which is better, flexi-cap or multi-cap funds?

Though multi-cap funds have performed better over the past three years than flexi-cap funds, past performance does not indicate future results, and other factors like the fund manager's expertise, fees, and overall investment strategy should be considered.

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How do flexi-cap funds allocate assets?

Flexi-cap funds allocate assets dynamically across different market capitalizations (large-cap, mid-cap, and small cap) based on market conditions and the fund manager's investment strategy. As per the Securities and Exchange Board of India (SEBI), they must invest at least 65% of their assets in equity and equity-related instruments.

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Are multi-cap funds riskier than flexi-cap funds?

Generally, multi-cap funds are considered riskier than flexi-cap funds. A multi-cap fund must invest at least 25% of its assets in each market cap (large, mid, and small). This fixed allocation ensures diversification but exposes the fund to the volatility of mid-cap and small cap stocks, which tend to be more susceptible to market fluctuations, especially during economic downturns.   

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What are the advantages of investing in flexi cap funds?

Flexi-cap funds offer diversification, potential for higher returns, and lower risk through dynamic allocation across different market caps.

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Can flexi-cap funds outperform multi-cap funds?

Yes, flexi-cap funds can outperform multi-cap funds. Flexi-cap funds offer fund managers flexibility, allowing them to dynamically adjust the portfolio based on market conditions, which provides better returns, especially in volatile market environments. However, the performance of any fund depends on the skill and experience of the fund manager.

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What is the ideal investment horizon for multi-cap funds?

An investor should invest in multi-cap funds for at least five to seven years.

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How do multi-cap funds diversify across market capitalizations?

As per SEBI regulations, multi-cap funds must invest at least 25% of their assets in each market capitalization category: large-cap, mid-cap, and small cap.

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Which fund type offers more flexibility, flexi-cap or multi-cap?

Flexi-cap funds offer more flexibility than multi-cap funds. In multi-cap funds, the fund manager has to mandatorily invest a minimum percentage of 25% in each market cap category (large, mid and small), whereas flexi-cap funds have the freedom to allocate investments across different market caps based on market conditions.

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How are flexi-cap and multi-cap funds taxed in India?

Since both are equity mutual funds, it means they follow the same tax rules:

Short-Term Capital Gain Tax:  If the investment is sold within one year, the profit is taxed at a flat rate of 20%.

Long-Term Capital Gain Tax: If the investment is held for over a year, the first Rs. 1.25 lakh of long-term capital gains is tax-free. Any gains above Rs. 1.25 lakh are taxed at a 12.5% rate.

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