The multi-cap funds frenzy: How do these stack against flexi caps?

What are multi-cap funds?

Multi-cap funds are required to invest in companies across different market caps for exposure to all market segments. As of September, 24 multi-cap funds with ₹1.2 trillion in assets under management (AUM) were available in India. The 5.7 crore active SIPs in this group demonstrate the growing popularity of this segment and their strong preference for diversified investments. Thanks to this framework, fund managers can take advantage of opportunities in various segments according to market movements.

Multi-cap vs flexi-cap: Key differences

The primary distinction between flexi-cap and multi-cap funds is how they are allocated. Multi-cap funds are required to adhere to the 25% rule, which offers a standardised framework. Flexi-cap funds can dynamically alter their allocations, between the large, mid-, and small-cap segments based on the potential seen by the fund management. The AUM for flexi-cap funds as of September 2024 is ₹0.9 trillion, indicating a similar interest but meeting distinct investor needs.

Growing interest amid market valuations

The present developments in market valuation can be connected to the growing popularity of multi-cap funds. Flexi-cap and multi-cap funds are appealing because mid- and small-cap equities are viewed as cheap as compared to large-cap firms. Multi-cap funds provide a sense of security by enabling investors to access large-cap stocks while also enjoying the growth opportunities presented by mid- and small-cap stocks. Flexi-cap funds may be a suitable choice for those prepared to take on greater risk in exchange for potentially higher returns due to their flexibility.

Also Read: How hybrid funds can mitigate various investing risks

Risks and returns: What to consider

Investing in funds that cover a wide range of stock sizes helps spread out risk, but it comes with its own set of risks. Even though these funds can be profitable, small- and mid-cap companies are more erratic than large-cap equities, which implies that multi-cap funds could experience bigger ups and downs during tough periods.

On the other hand, bullish markets have a higher chance of producing large rewards. Because multi-cap funds have active management, their expense ratios are typically higher, which may impact returns during turbulent periods. On the other hand, the built-in flexibility in reallocating money can provide as a safety net in times of recession.

Market sentiment and investor preferences

Information from the Association of Mutual Funds in India (Amfi) indicates that individual investors are the leading force in the equity fund industry, controlling 88% of equity fund assets. This highlights the persistent preference for equity over debt and passive funds. Indian shares have regularly been purchased by both domestic institutional investors (DII) and foreign institutional investors (FII). So far this year, FIIs have invested ₹1.35 lakh crore in the market, and DIIs have contributed about ₹72,000 crore, boosting investor trust in a diversified portfolio approach even further. 

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SIP vs lumpsum: Market timing

In light of current market conditions, investors who are concerned about timing the market might discover a systematic investment plan (SIP), a more secure option. SIPs allow for rupee cost averaging, which mitigates the impact of market movements. However, during a market downturn, investing a large sum at once in multi-cap funds could lead to significant profits for individuals who can handle more risk and have a longer investment timeline. Ultimately, it all comes down to your risk tolerance and financial goals. 

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Is this the correct time?

Due to their structured and diversified strategy, multi-cap funds provide a chance to generate growth without taking on excessive risk in a balanced manner. Investors with a long horizon might choose to include multi-cap funds in their portfolio.

Market sentiment and valuation market dynamics determine asset allocation, along with micro (stock-specific) and macro factors. Portfolio construction is a complex process. It is crucial to seek guidance from a financial advisor to ensure that these investments align with your overall financial strategy.

(Dilshad Billimoria is founder, managing director, and chief financial planner at Dilzer Consultants Pvt. Ltd.)