Retail investors are increasingly choosing mutual funds as a way to invest in the equity markets. The convenience and affordability of investing in mutual funds, along with the variety of schemes available, have led to such preferences. Mutual funds can invest in numerous asset classes––as well as different securities within the same asset class. Equity mutual funds, for example, can invest in companies across the market capitalisation spectrum.
Unlike some equity fund categories––that exclusively invest in large, mid, or small caps––multi cap and flexi cap equity funds can invest in all market capitalisation segments. To facilitate this, every half year, AMFI publishes a list of companies ranked by average market capitalisation. Large caps are the top 100; mid caps are 101–250; whereas small caps rank 251 and beyond.
What are Multi Cap Funds?
Multi Cap funds are equity mutual funds that must invest a minimum 75% in equities, with at least 25% each in large, mid, and small caps. This fixed allocation floor forces true all-cap exposure. You get diversification across company sizes but also built-in small cap exposure, which can lift long term return potential but also raises short-term volatility. The fund manager can move the remaining 25% across caps or in cash but cannot exclude any one segment entirely.
What are Flexi Cap Funds?
Flexi Cap funds are equity schemes that invest across market caps with no mandated split. The manager can hold 0–100% in large, mid, or small caps based on valuations, liquidity, and market view. This freedom lets the fund tilt to segments with a more favourable risk-reward ratio and de-risk when small and mid-caps look overheated. Outcomes depend on the manager’s calls and process discipline.
Differences Between Multi Cap and Flexi Cap Funds
|
Dimension |
Multi Cap Fund |
Flexi Cap Fund |
|
SEBI mandate |
≥75% in equity with ≥25% each in large, mid, small |
≥65% in equity. No cap-wise minimums |
|
Core idea |
Structured all-cap exposure |
Dynamic all-cap exposure |
|
Manager flexibility |
Constrained by 25/25/25 rule |
Very high flexibility |
|
Small-cap exposure |
Always present (≥25%) |
Optional, can be zero |
|
Volatility |
Typically, higher than large cap or flexi peers in downcycles due to forced small cap weight |
Depends on tilts. Can be lower if the fund parks more in large caps |
|
Return drivers |
Broad market cycle plus small-cap cycle |
Manager’s allocation skill plus market cycle |
|
Fit in portfolio |
One-stop all-cap core for investors who want rules-based diversification |
Core or satellite depending on the fund’s style and your need for active allocation |
|
Key risk |
Cannot meaningfully cut small caps in frothy phases |
Style drift and wrong allocation calls |
Who should invest in flexi cap funds?
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Those who prefer the fund manager to dial up or down mid and small caps based on valuations and liquidity.
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Investors seeking a core fund with potential to limit drawdowns.
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Suitable for investors who want long-term equity growth potential with some guardrails from dynamic allocation.
Who should invest in multi-cap funds?
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Investors who want assured participation across the market-cap spectrum at all times.
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May be suitable for investors who do not want to decide cap weights themselves but still want access to all-cap growth potential.
Factors to consider when choosing between Flexi Cap vs Multi Cap Funds
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Risk appetite and horizon. If 25% small caps feels uncomfortable, lean Flexi. If you can digest swings and want guaranteed small cap exposure for a long horizon, multi cap may be suitable.
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Belief in active calls. Flexi relies on the manager’s allocation alpha. Review process, team, and consistency across cycles not just one-year charts.
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Portfolio overlap. If you already own dedicated mid/small cap funds, a Flexi tilted to large caps may balance risk. If you only hold large caps, Multi cap offers automatic breadth.
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Costs. Expense ratios matter. Over long periods, a small percentage point difference can impact potential compounding.
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Capacity and liquidity. Very large AUM can limit agility, especially in small caps. Scan portfolio churn, turnover, and concentration.
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Tax and rebalancing plan. Decide when you will trim or add. Use annual rebalancing to keep equity at target weights.
Taxation of Multicap Funds and Flexi Cap Funds
Both are equity-oriented for tax. For transfers on or after July 23, 2024:
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STCG (units held ≤ 12 months) is taxed at 20% plus surcharge and cess.
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LTCG (units held > 12 months) is taxed at 12.5% on the aggregate equity LTCG above Rs. 1.25 lakh in a financial year, plus surcharge and cess.
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Dividends are taxed at your slab rate and subject to TDS as applicable.
Most long-term investors prefer the Growth option and plan withdrawals via goal-based redemptions.
FAQs
Is a Multi Cap fund good to invest in?
Yes, if you want rule-based all-cap diversification and accept higher near-term volatility from the permanent small cap slice. Over full cycles, this structure can capture more of India’s growth engine but needs patience.
How do I choose between a Flexi Cap and Multi Cap fund?
Start with risk tolerance and existing holdings. If you already have mid/small caps or don’t prefer mandatory small cap exposure, Flexi may be suitable. If you want a single fund that always owns each segment, consider Multi Cap. Then shortlist funds with clear process, reasonable costs, and steady performance across 3, 5, and 7-year windows.
Can I switch between Flexi Cap and Multi Cap Funds?
You can but frequent switching may trigger capital gains tax and promote behaviour errors. Prefer an allocation rule. Example: keep one core Flexi and one satellite Multi Cap, or vice-versa, and rebalance annually instead of reacting to headlines.
Are there any tax implications for investing in Flexi Cap or Multi Cap Funds?
Yes. Redemptions within 12 months attract 20% STCG. After 12 months, 12.5% LTCG applies on the portion of your total equity LTCG above Rs. 1.25 lakh in the financial year. Dividends are taxed at slab rates. Use Growth for compounding and redeem against goals to manage tax impact.
Disclaimer: Taxation is subject to change and depends on the individual investor’s tax status. Investors are advised to consult their tax advisor before making any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.