Multi-cap and flexi-cap are two popular equity fund categories in India. With overlapping investing styles but some key differences, investors are often confused about choosing between the two. This handbook simplifies everything you need to know about multi-cap and flexi-cap funds.
Understanding multi-cap and flexi-cap funds
Multi-cap funds invest across large, mid and small cap stocks with a minimum allocation of 25% to each market cap segment. Flexi-cap funds have the flexibility to vary allocation to market caps from 0 to 100% based on the fund manager’s outlook. Both aim for diversification but flexi-caps can take concentrated bets.
Benefits of investing in each style
Multi-cap fund benefits:
– Diversification across market caps reduces volatility.
– Style remains consistent despite market changes.
– Suited for novice investors and core portfolio holdings.
Flexi-cap fund benefits:
– Fund manager has higher flexibility to capitalize on opportunities.
– Concentrated bets aid potential outperformance.
– Suited for experienced investors with higher risk appetite.
Analyzing market cycles and performance
In bull markets, flexi-cap funds can leverage high conviction stock bets to deliver outsized returns, while multi-cap funds deliver more stable returns. In bear markets, multi-cap funds limit losses through diversification, while flexi-cap funds may see deeper drawdowns. In volatile markets, it is important to focus on the fund manager’s performance consistency, as flexi-cap funds require expertise to manage through periods of market turbulence. Overall, flexi-cap funds are geared for outperformance but need seasoned fund management, while multi-cap funds aim for stability.
Choosing the right fund manager style
In addition to the fund category, the fund manager’s investment style and stock selection skills also affect returns. The following are some key aspects to consider:
- Market capitalization preference: Do they focus on large-cap, mid-cap, or small-cap stocks?
- Investment approach: Do they use a bottom-up or top-down approach?
- Risk appetite: How aggressively do they manage risk?
- Loss limiting ability: How well do they control drawdowns?
It is important to choose fund managers who are aligned with your own risk profile and investment goals.
Integrating multi-cap and flexi-cap in your portfolio
A portfolio can strategically utilize both fund types in the following ways.
- Core-satellite: A multi-cap fund can be used as the core of a portfolio, with a flexi-cap fund used as a satellite to generate additional returns.
- Market cap tilt: A multi-cap fund can be used for diversification, with a flexi-cap fund used to make bets on specific market capitalization segments.
- Long-short: A multi-cap fund can be used for long-term holdings, with a flexi-cap fund used for short-term bets.
This provides both stability and outperformance potential.
Avoiding risks and mistakes
The following are some risks and mistakes to avoid when choosing either style of investment:
- Chasing recent outperformance: Do not invest in flexi-cap funds simply because they have outperformed in the short term.
- Ignoring market cycles: Do not exit multi-cap funds just because flexi-cap funds have done better in some markets.
- Too much portfolio concentration: Do not over allocate to only one fund type.
- Not matching risk profile: Aggressive flexi-cap bets without the appropriate risk appetite can be damaging.
It is crucial to keep these points in mind for long-term returns.
Conclusion
Analyze your goals, risk appetite and the fund manager’s style before deciding between multi-cap and flexi-cap funds. A balanced portfolio can utilize both to benefit from stability and growth opportunities. Maintain discipline and a long-term view for successful equity investing.
