Mutual funds tend to be the first choice for first-time investors who don’t have the time and expertise to evaluate and analyze stocks and bonds separately. Not only because of better returns, but also because of the difference in risk and flexibility in investment. Before clearing the confusion, let’s have a brief definition of multi-cap and flexible-cap funds.
Multi-cap funds invest in different companies with different capitalizations regardless of the theme of the company or stock. It helps investors get the stability benefits of large-cap funds and accumulate in small and medium-sized funds. Fund managers invest at least 25% of the total fund in each market value stock.
Flexi Cap Funds
Flexi-cap funds are a type of mutual fund in which fund managers invest various amounts of market capitalization irrespective of the theme. In flexi cap funds, 65% of the total fund is invested in all market cap equities.
Broadly speaking, both the funds look the same, but there is a small but significant difference in both the schemes which can change your investment decision. Let us understand some of them:
In the case of multi-cap funds, fund managers are restricted to invest at least 25% each in small, mid and large cap funds. In case of flexi cap funds, there is no such ratio limit by SEBI. However, 65% must be invested in the company’s equity.
During a slow economy, large companies do well and provide stable returns, but when the economy improves, small and mid-cap funds provide better returns than large-cap funds. In this case, restrictions on the amount of money will limit your fund manager to get better returns.
In flexi cap funds, the fund manager has enough freedom to move your funds into stocks. You can choose your fund based on the restrictions on the ratio.
If you have a high risk appetite for higher returns by taking higher risks and investing for a longer period of time, then multi-cap funds are best for you as they have a longer time frame of around 5-10 years. To get the desired results from mid and small cap stocks.
Conversely, if you don’t want to take a lot of risk and get stable returns, a flexi cap fund might be a better choice for you as you have a high 35% stake in debt and other asset classes.
The expense ratio depends on the activeness in money management. When you invest in actively managed funds, you pay a higher expense ratio than passively managed funds. Actively managed funds are where fund managers buy and sell securities frequently to get good returns. Flexi funds are more active funds, so, you have to pay higher expense ratio than most cap funds.
Based on the above cut-off points, you can make your investment decisions effectively. If allocation determines your risk and return, your spending will determine your net income, and suitability will determine whether or not you should invest.
Anushka Trivedi is a freelance financial content writer. It can be found on her anushkatrivedi.com
Investors usually prefer to invest in mutual funds that consistently beat their benchmark indices.
First Published: Dec 22, 2022, 11:30 am IST