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Multi Cap Funds Or Flexi Caps? What’s A Better Option?

Whether it is about choosing the right kind of clothing at a multi brand outlet, or eating at a multi-cuisine restaurant or making the right kind of investment – flexibility is seen as a virtue. In the light of this, flexi cap funds which are free to invest across the market capitalisation spectrum are believed to be a better alternative for investors who look for diversified fund as a sound investment bet.

For the uninitiated, flexi mutual funds are allowed to choose the ratio between large, mid and small caps as it deems them fit. On the other hand, multi cap funds are mandated to keep a minimum threshold of 25 percent in each of the three fund categories.

When this distinction was introduced after SEBI guidelines came into force, several mutual funds in the multi cap category moved to flexi cap.

Consequently, the multi cap space remains wide open with a number of AMCs yet to launch fund schemes in this space.

In the March quarter, net inflow of multi cap funds was 11,171.26 crore and the assets under management (AUM) for a total of 14 schemes under this category is 54,932 crore, as per AMFI data for Q4 of fiscal 2022.

In the month of March, the largest inflow in multi cap funds happened because of 8,000 crore NFO of SBI multi cap. Prior to this, Axis and HDFC mutual fund’s multi cap NFOs garnered huge money in the month of December.

At the same time, net inflow for flexi cap funds is 8,950 crore and net AUM for a total of 31 schemes is 2,25,430, which is more than four times of multi cap funds’ AUM.

As RBI raised its repo rate by 40 basis points on Wednesday, the banks are likely to follow suit, thus impacting the rate-sensitive stocks as well as funds.

About the impact of repo rate hikes on mutual funds, S Sridharan, founder and principal officer of Wealth Ladder Direct says, there won’t be any direct impact on any category of mutual funds but cost of lending will rise in the aftermath of repo rate hike. “Lending rates of banks will increase, which may hinder companies’ ability to raise money and invest. This will impact the profit margin of companies and in turn, the mutual fund returns,” he says.

The maximum return in multi cap category was posted by Baroda BNP Paribas Multi Cap Fund that gave a return of 35.19 percent.

“Whether an investor chooses flexi cap or multi cap depends on their risk appetite. In multi cap, investors are aware of the amount of risk they are undertaking whereas in flexi cap funds, they are not aware of the level of risk,” adds Mr Sridharan.

He explains this with an example. “Let us suppose a flexi cap scheme has 40 percent allocation to mid-cap and 30 percent each to large cap and small cap. When large cap stocks are expected to rise, the fund manager might allocate most of the portfolio to the large cap stocks. This way, investors’ wealth become more vulnerable to one category of funds. So, investors are unaware of the risk they take in flexi cap funds,” he adds.

On the other hand, in multi cap funds, investors are aware of the asset allocation i.e., 25 percent each in large cap, mid cap and small cap funds.


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