Flexi-cap funds lead equity category for 8th month: How do they differ from multi-cap funds, and which one to choose?

A flexi-cap fund provides the fund manager with the much-needed flexibility to adapt to changing market conditions. For example, during a broader bull run, usually mid and small-cap stocks outperform. During such times, the fund manager can increase allocation to these categories.

Similarly, during times of economic uncertainty, the fund manager may pare down exposure to mid and small-cap stocks to mitigate volatility and increase allocation to large-cap stocks, which are relatively stable.

In another scenario, where mid and small-cap stocks have run up significantly and valuations have turned expensive, the fund manager can reduce allocation to these categories. Thus, the fund manager has the flexibility to increase or decrease allocation to a particular category or categories depending on the perceived risk-reward opportunity.

In a flexi-cap fund, the role of a fund manager is very important, as they decide the allocation to each category. If the fund manager’s decision is right, the fund outperforms, and investors earn good returns. If the market moves in the opposite direction, the fund will underperform, and investors may incur losses.

Many investors compare flexi-cap funds to multi-cap funds, as both funds invest across large, mid, and small-cap stocks. However, the way the funds invest in these categories is different. Hence, let us first understand what multi-cap funds are, and then compare the two funds.

A multi-cap fund provides investors with the stability of large-caps and the growth potential of mid and small-caps. As a multi-cap fund follows a fixed allocation rule, it limits the fund manager’s role and flexibility. The fund provides diversification to investors across market capitalisation.