Investing wisely is a crucial aspect of financial planning. For many, mutual funds have become a preferred choice due to their potential for wealth creation. When it comes to equity mutual funds, two popular options are multi-cap funds and flexi-cap funds.
Let’s understand the key differences between the two, helping you make informed investment decisions.
What are multi-cap funds?
Multi-cap funds are equity mutual funds in India that invest in stocks across various market capitalisations. These funds invest in a balanced mix of companies across all market capitalizations: large-cap (established giants), mid-cap (dynamic growth engines), and small-cap (emerging stars). This diversification offers a blend of stability and growth potential, making them suitable for investors seeking moderate risk and long-term wealth creation.
What are flexi-cap funds?
Flexi-cap funds, as the name suggests, provide flexibility in terms of market capitalisation. These funds also invest across large-cap, mid-cap, and small-cap stocks, but the key distinction lies in the fund manager’s discretion to allocate assets based on their assessment of market conditions. This adaptability allows flexi-cap funds to navigate changing market scenarios and capitalise on emerging opportunities.
Difference between multi-cap funds and flexi-cap funds
1. Equity exposure
While both categories invest in equities, the minimum requirement differs. Multi-cap funds must dedicate at least 75% of their assets to equity funds and equity-related instruments, while flexi-cap funds have a slightly lower minimum of 65%.
2. Market cap allocation
The defining characteristic lies in their market cap allocation. Multi-cap funds are required to maintain a minimum 25% exposure to each market cap segment – large, mid, and small. This ensures a balanced portfolio but limits the fund manager’s flexibility to capitalize on specific market trends. Flexi-cap funds, on the other hand, have no such restrictions. They can freely allocate their assets across market caps, potentially tilting towards higher-growth segments during bull markets or seeking refuge in large-cap stability during volatile times.
3. Risks
The balanced nature of multi-cap funds translates to moderate risk and returns. They offer a blend of stability and growth potential, making them suitable for investors with a moderate risk appetite. Flexi-cap funds, with their focus on flexibility, can potentially generate higher returns but also expose you to higher risk, particularly during market downturns.
4. Tax implications
Both short-term and long-term capital gains on multi-cap and flexi-cap funds are taxed similarly. Short-term gains within a year are taxed at 15%, while long-term gains after a year are subject to a 10% tax on amounts exceeding Rs. 1 lakh for both categories.
Which one is right for you?
Choosing between multi-cap and flexi-cap funds depends on your risk tolerance and investment goals. If you seek stability and diversification, a multi-cap fund might be ideal. If you are comfortable with higher risk for potentially higher returns and trust the fund manager’s expertise, a flexi-cap fund could be your pick. Remember, thoroughly research the specific funds and consult a financial advisor before making any investment decisions.