In today’s rising market, mutual fund investments are drawing attention due to the high returns being offered. However, along with these promising returns, the risk factor also rises. With the Indian market’s valuation increasing, investors are looking for ways to diversify their portfolios to reduce this risk. When it comes to mutual funds, both multi-cap and flexi-cap funds offer diversification, but they differ in certain aspects. Let’s break down these two options and understand which could be the right investment choice right now.
Multi-Cap vs Flexi-Cap: What’s the Difference?
Both multi-cap and flexi-cap funds invest across large-cap, mid-cap, and small-cap stocks. However, their approach varies. Multi-cap funds are required to invest a certain percentage of their portfolio in small-cap and mid-cap stocks. Flexi-cap funds, on the other hand, have no such restriction. This flexibility allows the fund manager to adjust the investments based on the market conditions.
For instance, during volatile periods, the manager of a flexi-cap fund might choose to increase exposure to large-cap stocks to reduce risk. Multi-cap funds, due to their mandatory allocation in small and mid-cap stocks, may appear more vulnerable to market fluctuations. However, they also hold the potential for higher returns during favorable market conditions.
Performance Insights: Which Fund Has Done Better?
When it comes to recent performance, multi-cap funds have outperformed flexi-cap funds in terms of returns. Multi-cap funds have delivered an average return of 43.88% over one year and 21.45% over three years. Comparatively, flexi-cap funds have generated an average return of 39.81% and 18.04% over the same time frames.
These numbers indicate that multi-cap funds have yielded better returns in the recent past, which can be attributed to their higher allocation in small and mid-cap stocks. However, with this higher return comes higher risk.
What About the Risk?
The current market conditions make risk management a key factor when choosing between these two types of funds. According to data, the price-to-earnings (PE) ratios for mid-cap and small-cap stocks are above their historical averages, which indicates a higher level of risk in these segments.
Flexi-cap funds offer an advantage here, as they allow the manager to adjust the portfolio based on the market’s movement. This means that during periods of uncertainty, a flexi-cap fund may shift more heavily into large-cap stocks to minimize risk. On the other hand, multi-cap funds have no such flexibility, which could lead to increased volatility in their returns.
In short, multi-cap funds may currently be riskier than flexi-cap funds due to their required investment in more volatile small and mid-cap stocks.
With the market at an all-time high and risks increasing, investors need to carefully consider how they diversify their portfolios. Multi-cap and flexi-cap funds both offer diverse exposure, but the level of risk and potential return depends on the flexibility of the fund and current market trends.
