Why are investors selling flexi-cap and buying multi-cap funds? Simply Save

In 2020, the Securities and Exchange Board of India introduced new norms for multi-cap funds, mandating a minimum of 25 percent allocation each to large-, mid- and small-cap stocks.

Soon after, the capital markets regulator launched a flexi-cap category, which didn’t have restrictions on investing in large-, mid- or small-cap stocks.

Consequently, most funds moved to the flexi-cap category, while a few remained multi-cap.

Today, there are 33 flexi-cap funds while the count of multi-cap funds increased to 18 as of July from 19 at the end of 2021, with new fund launches.

Multi-cap and flexi-cap funds have been witnessing contrasting trends in terms of net inflows over the past three months.

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While multi-cap funds have seen net inflows (more money came in than went out) of Rs 3,340 crore, flexi-cap funds saw net outflows (more investments went out than came in) of Rs 1,317 crore in the past three months.

Moneycontrol spoke to Rushabh Desai, founder, Rupee with Rushabh Investment Services, to understand what’s behind the contrasting investment trend in these two fund categories, which fund is better suited to manage market volatility and factors to look at when selecting a multi-cap or a flexi-cap fund.

• The major difference in both the categories is that multi-cap funds invest at least 25 percent each in large-cap, mid-cap and small-cap stocks. Flexi-caps don’t have any restrictions in terms of market capitalisations.
• Multi-cap funds will have a higher risk because they are supposed to maintain at least 50 percent allocation in mid- and small-cap stocks at all times. If someone has a higher risk appetite, they can venture into or take risk in multi-cap funds.

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• If someone doesn't have a very high risk appetite, then probably they can venture into the flexi-cap segment. Overall, both will have high risk and both will require a longer time frame. The only difference is that multi-cap funds will have a slightly higher risk than flexi-cap funds.
• Historically, we have seen that higher returns have been generated from the mid- and small-cap spaces. But large-caps are equally important as they give stability to the portfolio as there is more volatility and cyclicality in the mid- and small-cap segments.
• Flexi-cap funds, in theory, if managed well would be a better bet in terms of managing market volatility because the fund manager has more flexibility and has no restrictions in terms of allocations.
• For investing in multi-cap or flexi-cap funds, a five-year time horizon is ideal for lump-sum investments and seven years for investments via the SIP (systematic investment plan) route. In the multi-cap segment, we have seen a lot of new fund offers (NFOs) in the past few months. The whole NFO push is one of the reasons why we have got so much inflows into multi-cap funds.

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