As a wise investor, you should ideally create a portfolio that is spread across market capitalizations. If you invest in equity mutual funds online, you should consider distributing your funds across different market capitalizations to ensure you reduce your risk while growing your profit exponentially. Two of the most critical equity mutual fund categories are flexi-cap and multi-cap mutual funds.
Here is a quick overview of flexi-cap and multi-cap funds and how the two are different:
What are flexi-cap mutual funds?
Flexi cap funds are open-ended, dynamic equity mutual funds that invest at least 65% of their total assets in equity and equity-related instruments of different market capitalizations – large-cap, mid-cap, and small-cap. There is no limit on the investment in a particular market capitalization. The exposure is managed dynamically, giving the fund manager better flexibility to explore new investment opportunities, increasing value and growth.
Typically, flexi-cap mutual funds online can invest in any company irrespective of market capitalization. The fund manager selects companies based on their growth potential rather than size.
What are multi-cap mutual funds?
Unlike flexi-cap funds, multi-cap mutual funds are mandated to invest at least 75% of their corpus in equities in a defined ratio. The fund should invest a minimum of 25% in large-cap companies, a minimum of 25% in mid-cap companies, and a minimum of 25% in small-cap companies. The remaining 25% can be invested in any market capitalization segment that has the potential to offer high returns while balancing risk.
The fund manager has little freedom in these mutual funds online because the market capitalization has to be maintained irrespective of the market condition.
What are the prime differences between a flexi-cap and a multi-cap mutual fund?
| Basis of Difference | Flexi cap mutual fund | Multi cap mutual fund |
| Equity exposure | As per SEBI guidelines, flexi-cap funds must invest at least 65% of their assets in equity and equity-related instruments. | As per SEBI guidelines, multi-cap funds should invest at least 75% of their assets in equity and equity-related instruments. |
| Market capitalization allocation | There is no limit on the investment across large-cap, mid-cap and small-cap companies. | In multi-cap mutual funds online, fund managers are obligated to invest at least 25% of the corpus in large-cap, 25% in mid-cap, and 25% in small-cap companies. The remaining 25% is invested in any company irrespective of market capitalization. |
| Freedom of fund manager | The fund manager has the freedom to invest in any company that seems promising regardless of its market cap. | The fund manager considers the market circumstances when adjusting the allocation of large-cap, mid-cap, and small-cap stocks in the portfolio. However, their freedom is restricted. |
| Tax | Any profit generated from flexi-cap mutual funds online within the first 12 months is classified as short-term capital gains and taxed at 15%. Gains after 12 months are long-term capital gains and taxed at 10% when they cross the exemption limit of Rs. 1 lakh per year. | Multi-cap mutual funds online investments held longer than a year are taxed according to the long-term capital gains. Long-term capital gains up to Rs. 1 lakh are exempt from tax, and the gains above this limit attract a 10% tax rate. |
Conclusion
As an investor, you can choose a type of mutual fund that aligns with your risk tolerance and financial objectives. To reduce your risk in both scenarios, consider investing through the SIP (Systematic Investment Plan) mode, and use the Tata Capital Moneyfy app to track and rebalance your portfolio timely.
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