What is the difference between Multi Cap and Flexi Cap Funds?

If you have been wondering what are multi cap and flexi cap funds, you can refer to SEBI’s product categorization circular issued in Oct 2017 that came into effect in June 2018. This circular allowed multicap funds to invest 65% of their assets in equity and equity related instruments across large cap, mid cap and small cap stocks. In Sept 2020, SEBI mandated multicap funds to maintain an exposure of atleast 25% each in large cap, mid cap and small cap stocks with the aim of providing greater diversification to multi cap fund investors. However, this limits the fund manager’s ability to leverage opportunities based on his/her outlook because at times it may be necessary to underweigh a particular segment that is expected to do poorly which would mean flouting the minimum 25% allocation mandate.

Hence in Nov 2020, SEBI introduced Flexi Cap Funds which are similar to Multi Cap Funds but follow a flexible investment mandate. The key difference between multicap and flexicap fund is the flexibility the latter has in changing allocation between large caps, mid caps and small caps while ensuring 65% of its assets are allocated to equity and equity related instruments. For instance, if the fund manager feels a need to reduce exposure to small caps during economic uncertainty, he/she can reduce the allocation to zero and increase the allocation to large caps/mid caps. But a multi cap fund can’t manage its portfolio in such a dynamic manner.

Investors who find comfort in remaining invested across market capitalizations irrespective of the market cycles with a fixed allocation in small cap, mid cap and large cap companies, can choose Multi cap funds. Those who prefer a flexible investment strategy that can increase/decrease exposure across market caps depending on the market outlook can opt for Flexi cap funds.