With the current rise in market volatility, many are choosing to opt for multi cap funds for a diversified investment portfolio. Such mutual funds invest at least 25 percent each in small cap, mid cap, and large cap stocks as per the new asset classification introduced by the market regulator. Before this, most multi cap funds contained a large proportion of large cap funds.
To make the transition easy and smooth for the multi cap investors, SEBI introduced flexi cap, a new category. In flexi cap funds, fund managers need to invest a minimum of 65 percent of the corpus in equities with zero restriction on investing in small, mid, and large companies.
Which mutual fund investment is better suited?
Each of the categories is formulated to work differently throughout the market phases. Let’s understand how each of the mutual funds would perform in different market cycles –
Bull market –
A bull market is when markets move up and the macroeconomic scenario is extremely positive. It is a phase where the small cap and mid cap funds rise rapidly and offer extraordinary returns. High liquidity is witnessed, and companies function without any constraints.
In this condition, as multi-cap funds mandatorily invest 25 percent in small cap, and 25 percent in mid-cap, they perform well in the rally. But in the case of flexi cap funds, allocation depends upon the fund manager and there is no mandate of at least 50 percent exposure in small and mid-cap funds. Thus, in the scenario of the bull phase, multi-cap mutual fund investment generally performs better than Flexi cap funds.
Bear market –
A bear market is a downward spiral market. In this phase, small cap and mid cap stocks are most impacted. Such stocks and companies may witness high liquidity crunch and volatility, which makes it difficult to exit positions. In such a phase, as Flexi caps hold the flexibility to simply allocate throughout the market capitalization, they may lower their exposure in mid cap and small cap funds. However, multi-cap funds still require mandatorily to invest a minimum of 25 percent in small cap and mid cap even during bearish markets. This considerably impacts the fund returns. Thus, when considering the bearish phase, flexi funds generally tend to perform better than multi cap funds.
Flexi cap mutual funds have the benefit of lowering their small/midcap stock exposure to nil during bearish phases. Multi cap mutual fund investment, on the contrary, might be well positioned during bull markets owing to their minimum 25 percent exposure in small cap and mid-cap stocks. Thus, flexi cap mutual funds can outperform multi cap mutual funds during bearish markets and multi cap funds may perform better than Flexi funds during the bullish phase.
As an investor, if you have a high-risk appetite with a long-term horizon of over 5 years, then you must opt for multi cap funds. Flexi cap funds are suitable for you if you want to take flexible exposure throughout market capitalization. However, compare investment plans based on your risk profile, investment objective, and investment horizon to zero on the preferred option.