Mutual funds: I get confused between multi- and flexi-cap funds. Can you explain the difference?

I need clarification on multi-cap funds and flexi-cap funds. I keep getting confused between them. Please explain the difference and suggest a few schemes in which I can start a monthly systematic investment plan (SIP).  

Sneh Chawla 

Reply by: Rajiv Bajaj, Chairman & MD, BajajCapital Ltd. 

Understanding the distinction between multi-cap and flexi-cap funds is essential for making informed investment decisions. Both types fall under the equity-oriented schemes category and should ideally be chosen when investors have a long-term investment horizon of at least seven years.

To provide some context, the stock market consists of various listed companies that are broadly categorised into three groups based on their market value. The first group is large-cap, which comprises the top 100 companies with the highest market value. The second group is mid-cap, comprising companies ranked between 101 and 250 in terms of market value. Finally, the third group is small-cap, which includes all the remaining listed companies, totalling over 5,000.

Regarding multi-cap fund schemes, the fund managers are obligated to allocate a minimum of 25% of the fund’s assets to large-cap stocks, another 25% to mid-cap companies, and an additional 25% to small-cap shares. The remaining 25% can be invested in companies, debt instruments, or kept as cash.

On the other hand, flexi-cap schemes offer greater flexibility to the fund manager in terms of changing the allocation among the different categories of companies based on their research and market outlook. This means that a flexi-cap fund manager could, for instance, allocate 50% of the fund to large-cap, 20% to small-cap, 10% to mid-cap, and the remaining 20% to cash and bonds, as per their assessment of market conditions and potential opportunities.

For investors looking to start investing in these types of funds, it is advisable to consider at least one scheme from each category, namely multi-cap funds and flexi-cap funds, and initiate a monthly investment plan through SIPs. SIPs allow investors to invest a fixed amount regularly, promoting disciplined and gradual wealth accumulation over time.

Here are some suggested schemes in each category:

Multi-cap funds: ICICI Pru multi-cap fund, Kotak multi-cap fund, Nippon India multi-cap fund

Flexi-cap Funds: Edelweiss flexi-cap fund, HDFC flexi-cap fund, Kotak flexi-cap fund.

However, it is essential to exercise due diligence and read the offer documents carefully before investing. Understanding the fund's investment strategy, historical performance, and associated risks can help investors make better-informed choices aligned with their financial goals.

(Views expressed by the investment expert are his/her own)