“We continue to advise clients to invest in multi-cap funds over flexi cap funds. The discipline of market cap allocation helps investors participate in the growth of mid and small cap stocks whilst large caps reduce the volatility in the portfolio,” recommended Manish Kothari, Co-founder & CEO, ZFunds.
Following the US Fed rate cut, mutual fund advisors have been recommending that investors increase their allocations to multi-cap and flexi-cap funds. These categories are expected to help investors outperform broader markets, especially for those with an investment horizon greater than three years.
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“We think both these categories will help investors outperform border markets. These are pure equity schemes and investors should consider them only if their investment horizon is greater than 3 years,” said Manish Kothari..In the last three years, multi-cap and flexi-cap funds have offered average returns of around 21.38% and 17.97%, respectively. During this period, nine multi-cap funds were available. Nippon India Multi Cap Fund delivered the highest return at approximately 28.03%, followed by ICICI Prudential Multicap Fund at 22.81%. Aditya Birla Sun Life Multi-Cap Fund provided the lowest return at 18.44%.
Around 27 flexi-cap funds have been available in the market for three years. JM FlexiCap Fund delivered the highest return at 27.85%, followed by HDFC Flexi Cap Fund, which provided a return of 26.41% during the same period. UTI Flexi Cap Fund recorded the lowest return at approximately 7.83%.
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According to the expert, both categories have outperformed their benchmarks and delivered superior risk-adjusted returns. “Both of these mutual fund categories allow fund managers to invest across market caps, sectors, and themes. Considering the regulatory requirements of these categories, funds that have outperformed their benchmarks have provided superior risk-adjusted returns,” said Kothari.
The SEBI recategorized mutual fund schemes in October 2017, prescribing a strict investment mandate for each category to ensure they remain true to their labels. It also introduced several new categories, including the multi-cap category.
Multi-cap schemes have been around for some time, but they resembled today’s flexi-cap schemes. When SEBI mandated a 25% investment in three major capitalizations (large, mid, and small caps) for multi-cap schemes, there was a demand for more flexibility in investment. This led to the introduction of flexi-cap schemes, which allow for investment across various market capitalizations and sectors/themes.
Since September 2020, multi-cap funds have been required to invest 25% each in large-cap, mid-cap, and small-cap companies. In contrast, flexi-cap funds are mandated to invest at least 65% of their total assets in equity and equity-related instruments. The flexi-cap category was launched in November 2020.
Given that multi-cap funds must adhere to the 25% mandate for each category, is it a better choice to invest in flexi-cap funds in the current market situation?
“Investors should go for multi-cap funds. The discipline of market cap allocation helps investors participate in the growth of mid and small cap stocks whilst large caps reduce the volatility in the portfolio,” mentioned Kothari.
In the multi-cap category, Quant Active Fund delivered the highest return of around 32.01% over the last five years. Multi-cap funds are benchmarked against the Nifty500 Multicap 50:25:25 – TRI, which yielded a return of 21.19% in the same period.
In the flexi-cap category, Quant Flexi Cap Fund achieved the highest return of approximately 35.46% over the last five years. Flexi-cap schemes are benchmarked against the BSE 500 – TRI and NIFTY 500 – TRI, which returned 22.13% and 22.01%, respectively, in the last five years.
Multi-cap schemes are recommended for investors with a higher risk appetite and a long investment horizon. These schemes invest 25% each in large-cap, mid-cap, and small-cap stocks. Their exposure to mid and small-cap stocks makes them extremely risky but offers the potential for higher returns.
Flexi-cap schemes are typically recommended for moderate investors looking to create wealth over a long period. Ideally, one should invest in these schemes with an investment horizon of five to seven years. Flexi-cap mutual funds provide fund managers the flexibility to invest across market capitalizations and sectors/themes, allowing them to make investment decisions based on their market outlook.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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