Flexi-cap vs multi-cap mutual funds: What is the difference and which one to choose?

An investor, depending on their risk profile, must diversify their equity portfolio across large-, mid-, and small-cap companies. In 2025, the Nifty 50 delivered a decent 10% return, the Nifty Midcap 150 Index was subdued with a 5% return, and the Nifty Smallcap 250 Index was the worst performer, falling 6%. Over the years, these indices have taken turns to outperform each other. Hence, the investor must diversify to spread risk and earn risk-adjusted optimum returns.

The flexi-cap and multi-cap mutual funds provide you with an opportunity to take exposure to large-, mid-, and small-cap companies through a single scheme. However, the way the two schemes work is different. In this article, we will understand how these schemes differ from each other, and whether an investor must diversify their portfolio through a flexi-cap or multi-cap fund.

What is a flexi-cap fund?

A flexi-cap mutual fund scheme is an open-ended scheme that invests in companies across market caps, i.e., large-, mid-, and small-cap stocks. The scheme must invest at least 65% of its total assets in equity and equity-related instruments with no allocation limits based on market capitalisation.

The fund manager has the flexibility to decide the allocation based on market capitalisation at any given time, taking various factors into account. These factors can include current economic conditions, overall market trend, individual company performance, sectoral rotation, etc. As the situation changes, the fund manager can dynamically take a call to increase or decrease the allocation based on market capitalisation.

For example, consider a scenario in which mid- and small-cap companies have delivered high returns over the last one to two years, and valuations are getting stretched. In such a scenario, a flexi-cap fund manager can redeem some money from mid- and small-cap companies and redeploy it in large-cap companies. In short, the flexi-cap fund manager can go underweight on mid- and small-caps and go overweight on large-caps.

Consider another scenario in which mid- and small-cap companies have underperformed in the last one to two years, and valuations have become attractive. In such a scenario, a flexi-cap fund manager can increase allocation to mid- and small-cap companies. Thus, depending on the current scenario and future outlook, the fund manager has the flexibility to take a call and deploy money accordingly, without any allocation limits based on market capitalisation.

What is a multi-cap fund?

A multi-cap mutual fund scheme is an open-ended scheme that invests at least 75% of its total assets in equity and equity-related instruments, based on market capitalisation. The scheme invests at least 25% of its total assets in large-cap companies, 25% in mid-cap companies, and 25% in small-cap companies, at all times. The fund manager has the freedom to decide on where to invest the remaining 25% of the scheme assets.

A multi-cap mutual fund scheme provides an investor with diversified exposure to large-, mid-, and small-cap companies, with at least 25% exposure to each category at all times. Thus, it provides allocation across market capitalisation within a single scheme. The investor benefits from the stability of large-cap companies and the growth potential of mid- and small-cap companies.

Differences between flexi-cap and multi-cap funds

Now that we understand the meaning of flexi-cap and multi-cap funds, let us look at their differences.

Category returns

Let us compare the returns from both categories.

Source: Value Research Online website

Note: The above returns are in CAGR and as on 20th January 2025. Past returns are not an indicator of future returns.

The table above shows that over the three and five-year periods, the multi-cap category has given better returns than the flexi-cap category. However, there may be individual flexi-cap funds that have given better returns.

Which fund should you choose?

Before choosing between a flexi- and multi-cap fund, you need to note that both funds invest a majority of their money in equities. Hence, they carry high risk and are suited for investors with an aggressive risk profile. For any equity scheme, the investment time horizon must be five years or more to benefit from the power of compounding in the long run. As both schemes are categorised as equity schemes, the tax treatment for capital gains/losses is the same.

Flexi-cap funds are suitable for agile investors who are willing to let the fund manager take control. These investors are okay with the fund manager allocating money to companies depending on the market conditions and future outlook.

Multi-cap funds are suitable for investors who want a minimum 25% allocation to large-, mid-, and small-cap companies at all times. These investors want a diversified portfolio to spread risk. They are okay with the fund manager allocating money to companies within the defined market-cap limits.

So, depending on the type of investor you are, you can pick a flexi-cap or a multi-cap fund for investment. You can work with a financial advisor who can do your risk profiling, identify your financial goals, develop a plan to achieve them, recommend appropriate mutual fund schemes, conduct regular reviews, and handhold you till the financial goals are achieved.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.

Disclaimer: This story is for educational purposes only. 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 decision.