Why Multi-Cap Funds Shine Brighter Than Flexi-Cap Funds

Introduction

Choosing between multi-cap funds and flexi-cap funds can be challenging. However, recent trends reveal that multi-cap funds have shown superior performance compared to flexi-cap funds. Here’s why multi-cap funds are shining brighter and how they offer a winning investment strategy.

Multi-Cap Funds: A Strong Comeback

Over the past 21 years, multi-cap funds have consistently outperformed flexi-cap funds. Historically, multi-cap funds have earned about 2% more annually than flexi-cap funds. While 2% might seem modest, it significantly impacts over time. For instance, investing in multi-cap could grow to ₹4.25 crore compared to ₹3.07 crore in flexi-cap —a difference of ₹1.18 crore!

If you start investing at age 25 and continue until retirement at 60, multi-cap funds could potentially provide you with 50-70% more money than flexi-cap funds, thanks to their superior long-term growth potential.

Flexi-Caps and Their Large-Cap Bias

Despite their flexibility, many flexi-cap funds heavily invest in large-cap stocks. Approximately 25% of flexi-cap funds have an average large-cap allocation of over 80%. Even with the freedom to invest broadly, many flexi-cap funds prefer the safety and stability of large-cap stocks.

Reasons Behind Multi-Cap Funds' Superiority

Forced Allocation Works Better: Multi-cap funds are required to invest at least 50% of their assets in mid-cap and small-cap stocks. This mandated diversification helps capture the growth potential of India’s economy, often driven by mid and small-cap companies. High-growth sectors like consumer goods, healthcare, and industrials are typically dominated by mid and small-cap companies, contributing to the superior performance of multi-cap funds.
Consistency in Returns: Contrary to popular belief, smaller holdings do not necessarily make multi-cap funds more volatile. Data shows that over 10-year periods, multi-cap funds have consistently outperformed flexi-cap funds. The multi-cap benchmark has outperformed the flexi-cap benchmark 90% of the time.
Avoiding Market Timing Pitfalls: Flexi-cap funds, with their freedom to invest anywhere, often shift towards large-cap stocks during market downturns. However, mid and small-cap stocks typically rebound faster during recoveries. Multi-cap funds, with their required allocation, stay invested in high-growth segments, ensuring they capture the upside during market rallies.

As Peter Lynch, a renowned investor, said, “Know what you own, and know why you own it.” Multi-cap funds exemplify this principle by balancing investments in large, mid, and small-cap stocks.

Conclusion:

For those in their 20s or early 30s, multi-cap funds offer a compelling investment strategy for building wealth for the future. While flexi-cap funds provide more flexibility, the evidence suggests that multi-cap funds offer more reliable long-term returns. The choice between multi-cap and flexi-cap funds depends on your investment goals and risk tolerance. Multi-cap funds are a superior option for steady growth and better long-term results.
Ready to explore a winning investment strategy? Start investing with Dhanvantree today and secure your financial future with smart investment choices.

Note: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing. The past performance of the schemes is neither an indicator nor a guarantee of future performance.

Choosing between multi-cap funds and flexi-cap funds can be challenging. However, recent trends reveal that multi-cap funds have shown superior performance compared to flexi-cap funds.