Flexi-cap vs multi-cap funds: Which offers better diversification and returns? What the data shows

Flexi-cap mutual funds, often called go-anywhere funds, can invest across large-, mid- and small-cap stocks, which is why they are seen as offering broad diversification. Multi-cap funds are often considered an alternative, as they also invest across market caps but in a structured way. Both categories spread money across market caps, but their mandates and approaches set them apart.

So has the flexible approach delivered better returns? We compare the top funds in each category, looking at their market-cap allocations and returns.

Top 10 flexi-cap funds

Here are the top 10 flexi-cap funds by assets under management (AUM), with their asset allocations and returns.

How these funds performed over 1, 3 and 5 years:

What does the data reveal?

Most flexi-cap funds have put nearly 60% of their AUM in large-cap stocks, which may limit their ability to generate higher returns. Most funds have delivered negative returns over the past year, and the category average is -3.68%. Over three and five years, the category average is 9.34% and 8.13%, respectively.

Himanshu Srivastava, Principal, Manager Research at Morningstar Investment Research India, says the freedom to change market-cap allocations can be a real advantage for flexi-cap funds, especially when markets are uncertain.

“Managers can increase exposure to relatively liquid and established large-cap companies while reducing exposure to segments where valuations appear stretched, or risks are elevated. Multicap funds have comparatively limited flexibility due to their mandatory mid- and small-cap allocations, which can leave them more exposed to segments that experience sharper corrections. However, flexibility should not automatically be equated with superior downside protection,” Srivastava told Livemint.

“Not all Flexi Cap managers actively change their market-cap allocations; some maintain relatively stable exposures based on their investment philosophy,” he added.

Top 10 Multi-Cap Funds

Here are the top 10 multi-cap funds by AUM, with their asset allocations and returns.

How these funds performed over 1, 3 and 5 years:

What does the data reveal?

Most multi-cap funds hold between 35% and 45% in large-cap stocks, which makes them less tilted towards large caps than flexi-cap funds. The category’s average return was -0.60% over one year and 11.22% over three years, higher than the flexi-cap averages for both periods.

What investors should know

M-cap diversification vs portfolio diversification: According to Morningstar’s Srivastava, diversification across market capitalisations does not necessarily translate into better overall portfolio diversification. “Factors such as sectoral exposure, stock concentration, investment styles, underlying business risks, and correlations between holdings are equally important. For instance, a fund may be diversified across market-cap segments but remain concentrated in sectors or businesses exposed to similar economic risks. Therefore, while Multi Cap funds offer diversification across market-cap segments by mandate, Flexi Cap funds can be equally well-diversified depending on how effectively the portfolio is constructed.”

The volatility factor: Multi-cap funds offer more consistent participation across market-cap segments, which can work in their favour during broad-based market rallies, particularly when mid- and small-cap stocks outperform large-caps. “Mid- and small-cap stocks generally carry higher liquidity risks and tend to experience sharper corrections during periods of market stress. Since Multi Cap funds must maintain at least 25% exposure to each of these segments, their ability to reduce these risks through market-cap allocation changes is relatively constrained,” Srivastava told Livemint.

The real diversification: According to Srivastava, diversification should also be assessed at the investor’s overall portfolio level. Someone already holding dedicated mid- and small-cap funds may find a large-cap-oriented Flexi Cap fund more complementary. Conversely, an investor seeking sustained exposure across all market-cap segments through a single fund may prefer the Multi Cap structure, provided they are comfortable with the associated volatility, he opined.

What you should do: For long-term investors, diversification should be evaluated holistically rather than solely through market-cap allocation or performance during bear markets.

Market-cap allocation provides an indication of where a fund invests, but does not fully capture its underlying portfolio risks. A defensively positioned fund may protect capital better during corrections but could also lag during subsequent market recoveries. Ultimately, the choice should be guided by the investor’s risk appetite, investment horizon, existing portfolio exposures, and investment objectives rather than the perceived superiority of either category, Morningstar’s Principal Manager Research noted.

Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.