About 54% of people prefer mutual funds over other investment options. But with so many options out there, it is difficult to know which is the right type of equity mutual fund for you, especially when you have options like multi-cap and flexi-cap funds which seem a lot similar.

If you’re wondering which of these two is the best option for you i.e. flexi-cap or multi-cap funds, let’s understand the difference between them.

Basic Difference between flexi-cap and multi-cap funds

Flexi-cap funds are required to invest about 65% in equity and related investments. At the same time, multi-cap funds are required to invest about 75% in equity and related investments. 

While flexi-cap funds have the freedom to invest across large, mid and small cap, multi-cap funds have to invest at least 25% across all three.

However, multi-cap funds are more volatile than flexi-cap funds.

Why?

Well, it is because historically, flexi-cap funds have allocated a larger part of their portfolios to large-cap companies. This is majorly because they have the freedom to invest as per their choice. 

Since multi-cap funds have to invest 25% of their portfolios in small-cap funds, therefore, they are a little more volatile than flexi-cap.

Here’s a brief overview showing the difference between flexi-cap and multi-cap funds:

Which one has higher returns?

Needless to say, since multi-cap has higher exposure to small-cap it has the potential to generate higher returns too but that comes with the price of volatility.

Since multi-cap is a fairly newer category, it is difficult to compare the returns of both types of mutual funds accurately.

But, if you look at the returns for the past 3 years, multi-cap has turned out to be a better performer.

However, this trend can certainly change in the future and doesn’t provide the true picture.  

Hence, you shouldn’t go just by looking at the CAGR. 

Also Read: How is income from Mutual Funds taxed in 2024?

Which one should you choose: flexi-cap vs multi-cap?

Both flexi-cap and multi-cap funds have the common objective of long-term wealth creation.

If you are comfortable with the volatility associated with a 50% allocation to mid- and small-cap stocks, choose a multi-cap fund. 

Alternatively, opt for a flexi-cap fund, which typically maintains a lower average allocation of 25-30% to mid- and small-cap stocks if you prefer a more conservative approach.

The ideal approach that a wise investor should prefer is to do their asset allocation properly based on their financial goals. Then based on the requirement, go for a flexi-cap or multi-cap. 

Just make sure that there isn’t too much overlap between the fund you select and your existing investments. 

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Disclaimer: The above content is for informational purposes only. The 1% News recommends consulting a SEBI-registered investment advisor before investing in any mutual fund.