Mutual funds stand as a point of reference of diversification, channelling investments across a spectrum of stocks or debt instruments. Crafting a portfolio in Multi Cap and Flexi Cap Funds that harmonizes with an investor’s financial aspirations necessitates a meticulous evaluation of various factors.
Among these, equity emerges as a potent force, capable of out spacing inflation and steering investors towards long-term financial milestones. Equity mutual funds, with their inherent diversification benefits, cater to risk-tolerant investors seeking a robust investment strategy.
What are multi cap funds?
Multi cap mutual funds have historically captivated investors by traversing the terrain of large cap, midcap and small cap stocks.
The appeal lies in the flexibility to navigate through diverse market segments. In a significant move in November 2020, the Securities and Exchange Board of India (SEBI) introduced a novel fund category named flexi cap funds. Simultaneously, alterations were made to the scheme mandates governing multi cap funds.
What are flexi cap funds?
Flexi cap funds, a trailblazing addition to the mutual fund landscape, embodies adaptability. These funds empower fund managers with flexibility to dynamically allocate investments across market capitalizations based on evolving market conditions. This responsiveness positions flexi cap funds as versatile instruments capable of optimizing returns amid ever changing market dynamics.
Multi cap funds under the spotlight:
While flexi cap funds exude flexibility, multi cap funds continues to hold sway in the investment realm. These funds exhibit a penchant for diversity, seamlessly straddling large cap, midcap, and small cap stocks. SEBI in 2020 also bought about modifications in the mandate of multi cap funds, directing them to ensure a more uniform allocation across market segments.
Salient features:
Diversification Dynamics:
Flexi cap Funds:
Leverage adaptability to dynamically distribute investments across various market segments based on the fund manager’s discretion and prevailing market conditions.
Multi cap Funds:
Exhibit inherent diversity by investing across large cap, midcap, and small cap stocks, offering a built-in diversification strategy.
SEBI Mandates Changes (2020):
Flexi cap funds:
Introduced as a new fund category by SEBI, providing fund managers with the flexibility to allocate investments across market segments as per their judgement.
Multi cap funds:
Experienced mandated adjustments from SEBI to ensure a more balanced distribution across different market capitalizations, aligning with regulatory framework.
Risk and Return profiles:
Flexi cap funds:
Primarily designed to cater to investor seeking dynamic strategies, accommodating varying risk appetites by allowing flexibility in allocation across market caps.
Multi cap Funds:
Ideal for investors desiring a diversified portfolio with exposure to different market segments, offering a balanced approach to risk and returns through allocations in large cap, midcap and small cap stocks.
The choice between flexi cap funds and multi cap funds hinges on an investor’s risk tolerance, preferences, and the desired level of portfolio dynamism. Flexi cap funds introduce a responsive, adaptive approach, while multi cap funds continue to champion diversification across market capitalizations. As the investment landscape evolves, understanding these fund categories empowers investors to align their portfolios with their financial objectives effectively.
SEBI implemented these regulations to address the lack of adherence to the true nature of multi cap funds prior to its intervention.
Before the mandate, many asset management companies (AMCs) were not aligning their investments with the designated categories, particularly in mid and small caps. In instances where a fund claimed to be a multi cap fund but allocated a significant 80% of its funds to large cap, it deviated from the essence of a diversified portfolio. Another motivation behind these guidelines was to stimulate liquidity in the small cap sectors, recognizing the importance of fostering activity and investment in this segment of the market.
Comparison Between Multi cap and Flexi Cap funds:
While both Multi cap and Flexi cap funds share the common trait of investing across various market caps, there exist fundamental distinction between the two.
Multi cap Funds:
Definition: Multi cap funds, being open-ended, allocate investments across various market segments with a minimum allocation requirement to each segment.
Risks: These funds invest in stocks of large, mid, and small cap companies, making them riskier compared to large cap funds focused on well established companies.
Tax implications: Considered as equity funds, returns from multicap funds are treated as short term capital gains (STCG) if held for less than a year, taxed at 15%. Long term capital gains (LTCG) on investments held for more than a year are taxed at 10% on gains exceeding Rs.1 lakh after indexation.
Risks and Benefits: Despite the inherent risk due to the 50% minimum exposure to mid and small caps, historical data suggests that, over extended investments periods, these segments have the potential to outperform large caps.
Suitable Investors: Multicap funds are ideal for those with a high-risk appetite seeking higher returns and diversification benefits, especially those with a time horizon of 5-7 years.
Flexi cap Funds:
Definition: Flexi cap funds are dynamic, open-ended funds with the freedom to invest across market cap segments without set restrictions.
Risks: With no minimum investment limits, fund managers can allocate based on market outlook, adjusting risk exposure during market volatility.
Tax implications: Similar to multi cap funds, returns are taxed as STCG if held for less than a year (15%) and as LTCG if held for more than a year (10%, exceeding Rs.1 lakh after indexation).
Risks and Benefits: Flexi cap funds offer the advantage of Dynamic Asset Allocations Funds. Managers can increase exposure to mid and small caps in bull markets and decrease them in bear markets, allowing for a balanced approach to risk and returns.
Suitable Investors:
Investors uncertain about their preferred market cap but seeking equity exposure may find flexi cap funds suitable for their investment profile.
Conclusion:
In the mutual fund arena, the choice between Multicap and Flexicap funds hinges on investor preferences and risk tolerance. Multi cap funds, known for historical diversification, remains steadfast post-SEBI changes in 2020. Flexi cap funds, introduced for adaptability, offer Dynamic Allocation based on market conditions.
For risk-diversified, long-term investors, multicap funds are a solid choice. Alternatively, those seeking may opt for flexi cap funds. Understanding these categories is crucial for aligning portfolios with financial objectives in an evolving investment landscape. Both funds serve unique roles, providing diversification and flexibility, tailored to individual goals and risk appetite. Embracing Online SIP strategies in both multicap and flexi cap funds can further enhance portfolio management, allowing investors to systematically invest and benefit from the potential growth opportunities in the market.