Multi cap vs Flexi Cap vs Focused Equity Funds: Which suits you better?

Stocks of listed companies are what equity mutual funds such as multi cap, flexi cap, and focused equity funds all invest in. All these funds invest differently in companies and generate wealth for investors based on their risk profile and financial goals. According to SEBI regulations, multi cap funds must have a minimum of 25% allocation in large caps, midcaps, and small caps whereas flexi cap funds must have at least 65% in equities and no market cap-related limits. As opposed to these funds, focused equity funds are mutual funds that invest in up to 30 stocks, with no restrictions on market cap or sectors. So for a beginner, which mutual fund category will suit better, let’s know from different industry experts.

Dikshit Mittal, Fund Manager & Senior Equity Research Analyst, LIC Mutual Fund Asset Management Ltd

Multi cap and flexi cap fund categories offer investors an exposure to a diversified group of stocks across market capitalisations of large cap, midcap and small caps.

According to SEBI regulation, multi cap funds need to maintain minimum 25% each in midcap, small cap, and large caps respectively. There is no such constraint on flexi cap funds, and they can freely allocate between various market caps depending on fund manager views.

This differentiation has its own advantages and disadvantages. Key advantage while investing into multi cap funds is that investors get automatically diversified between small, mid and large cap companies, and investors can get risk adjusted returns.

Flexi cap funds offer much more flexibility to fund managers to move between various market caps, and investors can gain from skill of FM to get returns.

However, in terms of diversification across market caps, flexi caps may be skewed in favour of large/mid or small cap stocks depending on FM views.

Focussed equity funds follow a strategy of having concentrated portfolios, so it may be suitable for high risk taking investors.

Aniruddha Bose, Chief Business Officer, FinEdge

Key differences between the above-mentioned categories

All three are categories of equity mutual funds, and are therefore high risk/ high reward in nature. Between multi cap and flexi cap funds, multi caps are riskier and have higher return potential, since they have a mandated allocation of 25% each to small caps and mid-caps respectively, unlike flexi cap funds that are free to determine their allocation percentage to each market cap segment. 

Most flexi cap funds today maintain a 70-75% allocation to blue chip stocks, and so are just large cap funds with a “twist” in a sense! Unlike multi caps and flexi caps, focused equity funds are allowed to invest in a maximum of 30 stocks - and so tend to make high conviction bets and follow a “value” based strategy over a “growth” strategy. This makes them suitable for more aggressive and savvy investors who do not chase trends, because returns from focused funds may not be correlated with the movements in broader indices.

How much returns can be expected in each?

Over the long run, flexi cap funds can provide returns that are in sync with large cap indices – so an 11% CAGR would be a reasonable expectation to have. Multi caps and focused funds have the potential to deliver slightly higher long-term returns, so one can expect around 13% CAGR from both categories. Having said that, investors must make themselves aware of the non-linear nature of equity returns – meaning that you may well have a couple of years of negative returns followed by a year of supernormal growth. 

Also, these are expected long-term investment returns - not speculative short-term returns based on market timing. It is always advisable to invest into equity funds systematically, and with clearly defined financial goals in mind. Ad hoc, returns centric investing can completely derail your investment journey and lead to losses in your portfolio, so be sure to start off with the right expectations before you invest into any of these types of funds.

Time horizon to invest in each?

Flexi cap funds are recommended for financial goals that are at least 5 years away. Multi caps and focused funds require a longer time horizon, and are highly suitable for goals that are 7-10 years away or more, such as your retirement. The increases element of volatility that can be expected from these two fund categories acts as a plus point for longer goals, as you’ll achieve a higher degree of rupee cost averaging from them.

Which mutual fund to pick and which type of investors can invest?

Anyone who invests into equities should begin by setting the right expectations first, or else the dreaded “behaviour gap” will come into play and ruin their investing experience! First time investors into equity can wet their feet with flexi caps, as they may find the higher volatility associated with multi caps and the more relatively unpredictable, roller-coaster returns of focused funds a bit unnerving. 

Once they build up their investing confidence and awareness, they can progress to the latter – which have higher wealth creation potential in the long run. The support of a qualified advisor can go a long way in ensuring that your investing experience is relatively insulated from greed and fear driven decisions.

Please suggest some good performing mutual funds

Since multi caps are a relatively new category, there is not much to go by in terms of track record. Further complicating things is the fact that markets have been in an extended time correction for nearly 3/4th of the time that the category has existed! Going by AMC pedigree as well as the strength of the compliance and risk management team, you could consider investing into Kotak Multicap Fund in the multi cap space.

Franklin India Focused Equity Fund (previously – Franklin India High Growth Companies Fund) has an excellent history of delivering long-term returns. Even in its previous avatar, the fund used to maintain a concentrated portfolio of 30-35 stocks, and has managed to deliver a since inception return of 13%. As a fund house, Franklin Templeton has some of the best equity fund managers who have traditionally been adept at making high conviction value bets. Hence, we would suggest this fund in the focused fund space.

In the flexi cap space, we suggest UTI Flexi Cap – a fund with a track record of more than 3 decades (it was UTI Equity Fund in its previous avatar). The fund has delivered a since inception return of more than 12%, and its consistent focus on picking quality stocks with strong fundamentals makes it an ideal fund for first time investors looking to start investing into equities.

Rahul Jain, President and Head, Nuvama Wealth

The suitability of Multicap, Flexicap, and Focused Equity funds will differ depending on the investor. Focused funds are better suited for aggressive investors due to their concentrated portfolio (they cannot invest in more than 30 stocks). 

Those seeking alpha in their portfolio should consider multicap and flexicap funds, which invest in a mix of large, mid, and small cap stocks. Those who want limited exposure to small and midcap stocks should choose multicap funds, as there is a 25% limit for each market cap. On the contrary, those willing to give the fund manager complete discretion should consider flexicap funds, which have no market cap restrictions.

Dr. B. Balanagalakshmi, HoD, KLH Global Business School, Hyderabad

Investing in mutual funds is one of the most popular ways to grow wealth in the long run. However, choosing the right type of mutual fund can be a daunting task for many investors. Three popular types of equity mutual funds in India are multi-cap funds, flexi-cap funds, and focused equity funds.

Multi-cap funds are ideal for investors who are looking for a diversified portfolio with exposure to large-cap, mid-cap, and small-cap stocks. These funds provide investors with the flexibility to invest in companies of different sizes, thereby reducing risk.

Flexi-cap funds are best suited for investors who are looking for a mix of large-cap, mid-cap, and small-cap stocks, but with greater flexibility in the allocation of assets. These funds provide the fund manager with the flexibility to allocate assets based on market conditions.

Focused equity funds are suitable for investors who have a higher risk appetite and are willing to invest in a concentrated portfolio of 20-30 stocks. These funds offer the potential for higher returns but also carry higher risks.

In summary, the choice of mutual fund depends on the investor's risk appetite, investment horizon, and financial goals. A multi-cap fund is ideal for investors seeking diversification, while flexi-cap funds are better for investors who want flexibility in asset allocation. Focused equity funds are suitable for investors with a higher risk appetite and the willingness to invest in concentrated portfolios.

Dr. Babli Dhiman, Professor and HOD (Finance), Mittal School of Business, Lovely Professional University

When we are thinking about Stock Market Investment, basically we have three options with us, Multi cap, Flexi cap, and Focused equity funds. So, it is a big question, which source to a person in a better way so that we can multiply the money in a short span of time. Even for long-term investment, it will create wealth so definitely it is better to go with focused equity funds. 

Basically, if we are going to differentiate all these three funds, the focused equity funds is for the long run and it will give a you return if you are a risk taker and want to get a higher return. Flexi cap is less risky comparatively and it will give you moderate returns whereas, in Multi cap, one can invest but it is related to volatility management. 

Right here, Mid and Small-cap stocks help you with your investments. So, if you want to get better returns you have to look at the Focused equity funds which will give you a higher return as per your calculation.

CA Mahalakshmi C

Choosing a mutual fund to invest in might be daunting, but it’s important to remember that there’s no one-size-fits-all answer. An investor’s risk appetite and understanding of the market plays a very important role. 

Multi-cap funds have a very strict mandate. They HAVE to allocate 25% of the fund to large cap stocks, 25% to mid cap and 25% to small cap. 

Flexi funds invest in a range of sectors, so diversification comes from sectors, instead of from market caps of the companies. 

While picking between flexi and multi-cap, there are three things you need to consider- a) The strategy of the fund manager, b) How it fits in with the rest of your investments, and c) Your risk appetite. 

Since multi-cap funds have 25% of the funds to play with, some might invest most of this in small cap, making the investment riskier, and some might invest most of it in large cap. The risk depends on the strategy of the specific fund. 

Flexi cap funds on the other hand do not have strict mandates, and usually invest in  multiple sectors. Here too, the risk and reward will depend on the specific fund’s strategy. It will take a tad bit more time and effort to figure out the strategy and risk here, since there is complete flexibility in both sectors and market caps.

Focused funds invest in very few stocks, so the risk, and therefore the reward, is concentrated. If as an investor, you have really built conviction on a few specific stocks or sectors, and are extremely comfortable with the associated risk, focused funds are a good option. Focused funds are definitely the riskiest of the lot, but also have the potential for higher returns. 

If I had to rate them from safest to riskiest, especially for newer investors, I’d say Multi-cap comes first, then flexi, and then focused.