All about Flexi-cap and Multi-cap funds

With markets in a bearish phase & cryptocurrencies in turmoil in the past few months, millions of investors are bewildered and are wondering where to park their hard-earned savings. Most individuals have dreams and aspirations and invest in different asset classes to fulfil them. However, investors need to take some risks if they wish to beat inflation.

Of all the asset classes, equity is the only asset class that can help individuals get a higher return in the long run. While investors having time, skill and knowledge can invest in equity directly, for other investors equity-oriented mutual funds are the panacea for higher returns.

With so many categories of equity funds, investors are confused like the kid in a candy shop as to where to invest - large-cap, mid-cap, or small-cap funds? They may be curious to know if there are funds that invest across market caps and would solve their problem of choosing funds. For the uninitiated, companies are ranked based on their market capitalisation which is arrived at by multiplying the market price of their share by the total number of outstanding shares. To ensure uniformity in respect of the investment universe for equity mutual fund schemes, the Securities and Exchange Board of India (Sebi) has defined what are large-cap, mid-cap, and small-cap companies. The first hundred companies by market cap are called large-cap companies, those ranked from 101 to 250 are mid-cap companies and the rest are small-cap companies.

Sebi has also stipulated that the Association of Mutual Funds in India (AMFI), in consultation with the NSE and BSE, would publish the list of stocks based on market cap every half year. The latest list for the period ending June has been published by AMFI. Based on market cap Asset Management Companies (AMC) have launched Multi-cap & Flexi-cap funds. Though Multi-cap & Flexi-cap funds invest across the market cap, there is a difference in the way they invest in these companies. Hence, it is better to understand the features before investing in them.

The following is a primer on them:

Multi-cap funds

From October 2017 - when SEBI had announced guidelines on rationalisation & categorisation of mutual funds - till September 2020, Multi-cap funds had the freedom to invest across market capitalisations based on the fund manager’s perception of markets.

To diversify the underlying investments of Multi-cap funds across the large-, mid-, and small-cap companies and be true to the label, Sebi mandated that Multi-cap funds should invest at least 75% of the assets in equities & also allocate a minimum of 25% each in large-cap, mid-cap & small-cap companies.

Flexi-cap funds

To give more flexibility to the mutual funds and as per recommendations of the Mutual Fund Advisory Committee (MFAC), Sebi introduced a new category named “Flexi-cap fund” under equity schemes in November 2020.

As per guidelines, a Flexi-cap fund is an open-ended and dynamic equity scheme that will invest across companies of any market cap i.e large-caps, mid-cap & small-cap companies. The advantage for the fund manager is that he has the flexibility to manage the funds across market caps without any minimum threshold in each of the market caps.

However, a Flexi-cap fund must invest a minimum of 65% of its assets in equity and equity-related instruments. A fund manager can increase exposure to large-cap stocks in a falling market to provide stability to the fund & increase allocation to small & midcaps during a bull market to exploit the high returns potential.

After the Sebi guidelines on Flexi-cap funds, many AMCs have launched New Fund Offers (NFOs). As of March 31, 2022, there were 31 Flexi-cap schemes with Assets Under Management (AUM) of Rs 2,25,430 crore compared to the 14 Multi-cap schemes with an AUM of Rs 54,932 crore.

Some of the funds have also converted their Multi-cap funds into Flexi-cap funds with as many as 35 funds conversions to Flexi-cap funds.

What should investors do?

Though it is easier said than done, investors should study the scheme characteristics before investing in either Multi-cap or Flexi-cap funds and ensure that it matches their risk appetite. They must also check the past returns of the fund and its pedigree for a better understanding of the funds. Lastly, investors can decide whether to invest in a lump sum or take the SIP route to invest in these funds. In the final analysis, because of the flexibility they offer to the fund manager, Flexi-cap funds score over Multi-cap funds.

(The writer is a CFA & a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)