Flexi Cap vs Multi Cap Funds: Which One is Better to Earn Higher Returns?

Summary

The video from 5 Minute Finance by ET Money clarifies the differences between flexi-cap and multicap funds, two categories that often perplex investors. Post-2017 SEBI regulations, multicap funds are required to invest a minimum of 25% each in large, mid, and small-cap stocks, whereas flexi-cap funds offer managers the freedom to invest across market caps. The video compares the two, highlighting multicap funds' historical outperformance but also their higher risk due to significant mid and small-cap allocations. It advises investors to choose based on their risk profile, with an option to assess this through the ET Money app.

Takeaways

• 📈 Flexi Cap and Multicap funds are two categories of mutual funds that invest across different market capitalizations but have distinct characteristics.
• 🏛 In 2017, SEBI redefined mutual fund categories to ensure funds invested according to their mandates, leading to the creation of the Flexi Cap category in 2020.
• 🚫 Multicap funds are required to invest at least 25% each in large, mid, and small cap stocks, ensuring a diversified portfolio with a minimum allocation to each category.
• 🆓 Flexi Cap funds, on the other hand, allow fund managers the freedom to invest across market capitalizations without the 25% minimum restriction.
• 📊 As of May 2024, Flexi Cap funds have shown greater flexibility in market cap allocation, with an average of 58% in large caps and an increase in small cap allocation.
• 📉 Multicap funds have shown less change in their portfolio allocation, maintaining a more consistent distribution across large, mid, and small caps over the last year.
• 💰 Flexi Cap funds are the largest and most popular category in the equity space, with significant assets under management.
• 📊 Multicap funds have outperformed the S&P BSE 500 Index and Flexi Cap funds in the three-year period, showing a 23% return compared to 19% and 20% respectively.
• 📉 Despite outperformance, Multicap funds carry higher risk due to their mandated higher allocation to mid and small cap stocks.
• 📋 Investors should choose between Flexi Cap and Multicap funds based on their risk profile and comfort with the allocation to mid and small cap stocks.
• 🔍 The ET Money app offers an investor personality assessment to help individuals understand their risk profile and guide suitable investment choices.

Q & A

What are the two categories of mutual funds discussed in the video?

The two categories of mutual funds discussed in the video are flexi-cap funds and multicap funds.

What changes did SEBI make in mutual funds in 2017?

In 2017, SEBI redefined the categories of mutual funds through an exercise called the 'categorization and rationalization of mutual fund schemes' to ensure funds were investing according to their mandates.

How did the categorization affect multicap funds?

Multicap funds, which earlier could invest in any market cap, were restricted to invest at least 25% each in large, mid, and small cap stocks after the SEBI categorization.

What led to the creation of flexi-cap funds?

Flexi-cap funds were introduced by SEBI in 2020 to fill the gap left by the categorization of funds where fund managers could not decide freely on market cap investments.

What is the definition of large cap, midcap, and small cap stocks?

Large cap stocks are the largest 100 companies by market capitalization, midcap stocks are the next 101 to 250 companies, and small cap stocks are those ranked 251 and beyond.

Which fund is the largest flexi-cap fund and what is its asset size?

The largest flexi-cap fund is the Parag Parik Flex Cap Fund with assets worth 66,383 CR.

How do the portfolio allocations of flexi-cap and multicap funds differ?

Flexi-cap funds have more flexibility in changing their market cap allocation, while multicap funds have a fixed minimum allocation of 25% each in large, mid, and small cap stocks.

What has been the historical performance comparison between flexi-cap and multicap funds?

Over the three-year period, multicap funds have outperformed both the BSE 500 Index and flexi-cap funds, delivering a 23% return compared to 19% for flexi-cap funds and 20% for the BSE 500 TR.

How does the risk profile of multicap funds compare to flexi-cap funds?

Multicap funds are riskier than flexi-cap funds due to their mandatory higher allocation to mid and small cap stocks.

How can an investor determine their risk profile for investment?

Investors can determine their risk profile by taking the investor personality assessment available on the ET Money app, which guides them through suitable investment choices.

What is the final recommendation for investors considering flexi-cap and multicap funds?

The recommendation is to invest based on one's risk profile; if higher allocation to mid and small cap stocks is acceptable, multicap funds may be suitable, otherwise, flexi-cap funds could be a better choice.