More Multi Cap Funds Have Beaten Nifty Over Three Years Than Flexicaps — Here's Why

Multi-cap funds have done better at beating the benchmark indices, i.e. the Nifty and the Sensex, over the past three years when compared to flexicap funds, which were created when the category underwent a transformation in 2020.

The rules governing multi-cap funds changed in September 2020, when the market regulator, Securities and Exchange Board of India or SEBI decided that existing schemes weren’t true to label. Most such schemes were oriented towards large-cap stocks.

It is noteworthy that multi-cap funds must have 25% of their assets under management each in large-, mid-, and small-cap stocks, with the remainder left to the fund manager’s discretion. 

According to data compiled by NDTV Profit, more multi-cap funds beat their benchmark over the past year and three years as compared with flexi-cap funds.

This is because of the composition of multi-cap funds, which are mandated to hold a higher percentage of mid-, and small-cap funds. Flexicap funds, on the other hand, tend to have a much smaller allocation to broader-market stocks.

Over the past three years, the both the Nifty Midcap 150 and Nifty Small Cap 250 index, benchmarks for mid- and small-cap stocks, have doubled. Meanwhile, the Nifty 50 has gained close to 50%.

Multi-cap funds are meant for investors with a higher risk-taking ability, according to Amol Joshi, founder of PlanRupee Investment Advisors. These funds, because of their higher allocation to mid-, and small-cap stocks tend to have higher return potential, but at the cost of a higher risk of downside, he said.

Investors looking to invest in the category should look to combine these schemes with a flexi-cap fund, which gives a fund manager a blank slate, with no limits based on market capitalisation, Joshi said.

The returns generated by the top performing multi-cap and flexi-cap funds during the past year and three years have been comparable, based on data compiled by NDTV Profit.

Still, both of these schemes should account for up to 40% of an investor’s equity portfolio, Joshi said. He prefers the ICICI Prudential Multi-Cap Fund in the category.