There will be cycles when small and midcaps don’t do well but anyone remaining invested over 5 years will find that there is larger alpha potential in small and midcap segments.
Long-term investment opportunities always exist in the stock market. What one requires is the flexibility to manoeuvre funds as and when bargains get available. Multi-Cap mutual funds and Flexi-Cap mutual fund schemes are precisely meant to make use of such opportunities. Both of these schemes have a large canvas to invest across large-cap, mid-cap and small-cap stocks but with an important difference. Many investors want to know difference between flexicap and multicap funds and some are confused if flexi cap and multi cap are the same?
Multi-Cap funds have been in existence for a long time while Flexi-Cap funds were introduced last year in November 2020. While Multi-Cap funds were allowed to invest a minimum of 25 per cent across large and mid-small caps, there is no such mandate for Flexi-Cap funds. “A flexicap fund has the freedom to invest in proportion of the portfolio in any market cap without restriction. A multicap fund on the other hand will need to hold a minimum of 25% each in large, mid and small caps,” says Aashish Somaiyaa, CEO at White Oak Capital.
Do flexi-cap funds have a specifc advnatage when market sees a big correction? “When we talk about multi cap funds, in small and mid cap companies, exposure cannot go below 25 per cent. That means even if the market crashes, still the fund manager is obligated to remain invested atleast 25 per cent of the fund corpus whereas that’s not the case with Flexi cap funds. The fund manager can go down to 0 per cent also. So, in nutshell, the market capitalization of the company where a fund manager is investing plays a critical role for multi caps where as in Flexi caps it doesn’t matter. Flexi cap means the fund manager can invest whatever per cent in whatever company,” informs Rachit Chawla, CEO & Founder, Finway FSC.
Of late, many new Flexi-Cap funds have been launched by the fund houses. While many Multi-Caps have been converted into Flexi-Caps. But, if you are an existing investor of a Multi-Cap fund, will a conversion help? “Given that very large corpus multicap funds which held 70-80% of their portfolio in large caps due to their large AuM size and due to the underperformance of small and midcaps successively from 2018 till late 2020, have converted themselves into flexi cap funds; it is now unrealistic to expect those flexi cap funds to actually exercise the flexibility of the flexicap category. One can expect those large corpus flexi cap funds to remain more or less quasi large cap in nature,” says Somaiyaa.
Although, Flexi-Cap funds have given the freedom to fund managers to be flexible, catching the uptrend in any market-cap segment early-on is not an easy task always.
So, what should existing Multi-Cap investors do? “Any long term investor would do well to invest and remain invested in a genuine MultiCap Fund as per current regulatory definition i.e. a minimum of 25% each in large, mid and small market cap companies. There will be cycles when small and midcaps don’t do well and that’s the nature of the beast but anyone remaining invested over 5-10 years will find that there is larger alpha potential in small and midcap segments of the market and such MultiCap Funds will tend to outperform FlexiCap Funds,” informs Somaiyaa.
The decision to invest in Multi-Cap or Flexi-Cap schemes should not be based on the current market situation rather on your own risk profile and overall portfolio construction. “ There is no thumb rule as to which is right and which is wrong. Everything is linked to the market ultimately. The customer or the investor needs to understand the investor’s objective standpoint before actually taking a decision,” says Chawla. Whichever fund you choose based on the fund manager’s long term consistent performance, link them to your long term goal to reap the benefits.