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Diversifying Your Investments: Multi Cap vs. Flexi Cap vs. Multi Asset Mutual Funds

11 May 2024 - Tushar
Reading time about 6 minutes

Choosing the right mutual fund can be overwhelming, especially for beginners. Three popular options that offer diversification are Multi Cap, Flexi-Cap Funds, and Multi Asset funds. But what are the key differences between them?

Multi-cap Flexicap Multi Asset Funds

Multi-Cap Funds

Multi Cap Funds, as the name suggests, invest in companies of all sizes - large, mid, and small-cap. SEBI mandates that these funds allocate at least 25% of their portfolio to each category. This creates a diversified basket that offers a balance between stability and growth potential.

Investment Strategy of Multi-Cap Funds

  • Diversification: The core principle of Multi Cap Funds is diversification. By spreading investments across market capitalizations, they reduce overall portfolio risk. Large-cap companies provide stability, while mid and small-cap companies offer the chance for higher returns.
  • Fund Management: The fund manager plays a crucial role. They constantly monitor the market and strategically adjust the allocation between large, mid, and small-cap stocks to maximize returns while managing risk.

Benefits:

  • Balanced Risk-Reward: Multi Cap Funds offer a good balance between risk and potential returns. They are generally considered moderately risky compared to pure small-cap funds.
  • Long-Term Growth: These funds are suitable for long-term investment horizons (typically 5+ years). The diversification helps ride out market fluctuations and target capital appreciation over time. Things to Consider:

  • Moderate Risk: While diversified, Multi Cap Funds still involve equity market risk. Not Guaranteed Returns: Past performance is not indicative of future results.

Top performing Multi Cap Funds on 10 year basis

Scheme Name 1 year Returns(%) 5 year Returns(%) 10 year Returns(%)
Quant Active Fund 46.28 29.72 22.83
Nippon India Multi Cap 47.39 21.91 17.65
Invesco India Multi Cap 39.81 19.99 17.54
ICICI Pru Multi Cap 43.33 19.1 16.84
Sundaram Multi Cap Fund 36.89 17.87 16.26

Flexi Cap Funds

Flexi Cap Funds offer a dynamic and potentially growth-oriented option compared to Multi Cap Funds. Here’s a breakdown of what they are and how they work:

Investment Flexibility

Unlike Multi Cap Funds with their fixed allocation mandates, Flexi Cap Funds provide flexibility to the fund manager. They can invest across the entire market capitalization spectrum (large, mid, small-cap) without restrictions on the percentage allocated to each category. This allows them to:

  • Capitalize on Market Opportunities: The fund manager can identify and invest in companies with high growth potential across different market segments.
  • Adapt to Market Conditions: During volatile markets, the manager can adjust the portfolio by increasing exposure to large-cap stocks for stability or decreasing it to invest more in potentially high-growth mid and small-cap stocks during bull runs.

Risk and Return Potential

The risk profile of a Flexi Cap Fund can vary depending on the investment strategy adopted by the fund manager. Here’s a general idea:

  • Higher Risk, Higher Potential Return: If the manager leans towards mid and small-cap stocks, the risk profile increases. However, this strategy also offers the chance for higher returns compared to Multi Cap Funds.
  • Moderate Risk Strategy: The manager can also choose a more balanced approach, allocating a significant portion to large-cap stocks for stability alongside strategic investments in mid and small-cap for growth. This offers a moderately risky profile.

Top performing Flexi Cap Funds on 10 year basis

Scheme Name 1 year Returns(%) 5 year Returns(%) 10 year Returns(%)
Quant Flexi Cap 52.29 30.9 22.59
JM Flexi Cap 58.98 23.94 19.37
Parag Parikh Flexi Cap 34.75 23.44 18.95
Motilal Oswal Flexi Cap Fund 49.57 14.55 17.3
Franklin India Flexi Cap 40.92 19.79 17.01

Multi Asset Funds

Multi Asset Funds, unlike Multi Cap and Flexi Cap Funds which focus on equities, take a broader approach to investing. They spread your investment across various asset classes, offering diversification and potentially lower risk compared to pure equity funds.

Asset Class Mix:

  • Equities: Multi Asset Funds will include a portion of your investment in stocks, providing the potential for capital appreciation.
  • Debt: These funds also invest in fixed-income securities like bonds. This helps reduce overall portfolio volatility compared to pure equity funds.
  • Other Assets: Depending on the specific fund’s objective, some may also invest in other asset classes like real estate investment trusts (REITs), gold, or even international equities.

Benefits of Diversification:

  • Reduced Risk: By spreading your investment across different asset classes that often have an inverse relationship (when one goes down, the other might go up), Multi Asset Funds can help mitigate overall portfolio risk.
  • One-Stop Diversification: These funds offer a convenient way to achieve diversification without the need to invest in individual assets from various categories.

Types of Multi Asset Funds:

There are different Multi Asset Funds catering to various risk profiles:

  • Balanced Funds: These invest in a balanced mix of equities and debt, offering moderate risk and potential returns.
  • Aggressive Allocation Funds: These allocate a higher proportion to equities, targeting higher growth but with increased risk.
  • Conservative Allocation Funds: These prioritize debt and fixed-income securities, aiming for lower volatility and income generation.

Top performing Multi Asset Funds on 10 year basis

Scheme Name 1 year Returns(%) 5 year Returns(%) 10 year Returns(%)
Quant Multi Asset Fund 43.15 28.12 16.95
ICICI Pru Multi Asset Fund 30.12 19.92 15.84
SBI Multi Asset Allocation 27.22 14.74 11.59
HDFC Multi Asset Fund 20.61 14.72 11.12
UTI Multi Asset Allocation Fund 37.02 14.78 10.62

Which one to choose?

Multi Cap Funds: Ideal for investors seeking a diversified portfolio with a balanced risk-reward profile. Good for long-term wealth creation goals.

Flexi Cap Funds: Suitable for investors comfortable with moderate to high risk and looking for growth potential. Requires some understanding of market conditions.

Multi Asset Funds: A good option for investors seeking one-stop diversification across asset classes. Can be suitable for various risk profiles depending on the fund’s objective.

Remember: This is a simplified comparison. Always consult a financial advisor before making any investment decisions. They can help you choose the fund that aligns with your risk tolerance and financial goals.

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