Investors' Hangout: Multi cap VS Flexi cap

How are multi-cap and flexi-cap funds different?
Although a multi-cap fund and a flexi-cap fund are diversified mutual funds, they're a little different.

They're a little different in the sense that with flexi-cap funds, the fund manager is at absolute liberty to invest wherever he wants to. He can invest in large, mid and small caps without any limits.

If he thinks that he has to be substantially invested in large caps, he can do that; if he thinks he has to be substantially invested in mid caps or small caps, he can do that.

Multi-cap funds, meanwhile, are forced to invest in all of them. They must necessarily have at least a quarter (25 per cent) of their investment in large-, mid- and small caps, which means they are forced to be diversified at all times.

There is a possibility that flexi-cap funds may not be diversified; they may not be invested in small companies and mid-sized companies. But multi-cap funds will always be diversified. This is the key difference.

How do they compare on performance?
Looking at recent times, the multi caps look better, but you don't go by the last one-year performance. Multi-cap funds don't have a long history because most of them moved into the flexi-cap category. It became difficult for them to run the current structure (having to invest at least 25 per cent in small, mid and large caps).

When the new rules were framed for multi-cap funds, most funds moved their multi-cap funds into flexi-cap, as they wanted to retain the flexibility.

Therefore, multi-cap funds don't have a long history.

But going by the last one-year performance, multi-caps have delivered 24.54 per cent returns, compared to 20.76 per cent. That is nearly 20 per cent more returns, which is quite significant.

The difference is quite understandable because most flexi-caps have a very low allocation to small-cap stocks.

And because most multi-cap funds are forced to invest in small-cap stocks -- these stocks have been a blockbuster in the past year -- it has boosted the performance.

Multi-cap VS Flexi-cap: Which one should you choose?
While there could be occasions when it may not work to their advantage, I would say that multi-cap funds will always remain a better bet simply because they are forced to remain diversified at all times.

With flexi-cap funds, there are times when fund managers are heavily tilted towards large caps due to size constraints.

But if you're forced to diversify (like multi-cap funds), I think it will come in handy. You know there will be a good risk-return trade-off, you know the funds will be balancing their portfolio, which will help you generate superior risk-adjusted returns.

So, if I have to choose one equity fund today, I will choose a multi-cap fund.

Most flexi-cap funds have not been able to prove their case. Despite the great flexibility afforded to the fund manager, they haven't been able to deliver anything substantial.

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