Multi Cap vs Flexi Cap: Which Mutual Fund Gives Better Returns?

When in doubt, choose flexi-cap mutual funds—this is the usual advice for investors unsure about which market cap to pick: large-cap, mid-cap, or small-cap. Flexi-cap funds give the fund manager complete freedom to invest across market capitalisation without any restriction.

However, their sister category– multi-cap fund, has quietly delivered far higher returns over the years.

Multi-cap funds have been around for decades, with early examples like ICICI Prudential Multicap Fund (1994) and UTI Multi Cap Fund (2002). But the category took its current shape in 2020, when the Securities Exchange Board of India (Sebi) made it mandatory for all multi-cap funds to invest at least 25 per cent each in large, mid, and small caps. This ensured genuine diversification across all three segments. At the same time, responding to industry demand, Sebi introduced the flexi cap category for funds that preferred unrestricted allocation.

After the reclassification, some fund houses reworked their portfolios to fit the multi-cap definition, while others reshaped their schemes to become flexi-cap funds.

So, we looked at how these two categories have stacked up over the last three and five years.

Fifteen multi-cap funds have completed at least three years, and eight have a five-year track record. In comparison, 36 flexi cap funds have completed three years, and 21 have been around for five years or more.

Over the last five years, multi-cap funds have delivered an average return of 32 per cent, with median returns at 30.72 per cent. Flexi-cap mutual funds, on the other hand, delivered an average of 26 per cent and median returns of 23.71 per cent. This shows a clear outperformance by the multi-cap category.

How much difference would it have made to an investor’s portfolio? If an investor had invested Rs 5,000 per month via SIP for the last five years, flexi-cap funds would have grown to around Rs 6.06 lakh, while multi-cap funds would have built a significantly higher corpus of Rs 7.21 lakh.

The trend remains similar over the three-year period as well – multi-cap funds (21.32 per cent) beating flexi caps (19.35 per cent).

In a recent report by DSP Mutual Fund, which compared the performance of Nifty 500 Multicap 50:25:25 Total Returns Index (TRI) with that of the broader BSE 500 index, it highlighted that even though both categories can hold similar stocks, the multicap index has outperformed the Nifty 500, nearly 8 out of 10 times. Why does this happen? The report explains that the multicap index maintains at least 50 per cent allocation to mid and small caps, compared to just about 25 per cent in Nifty 500.

To stick to its definition, where the multicap index has to allocate 25 per cent each in large, mid, and small caps, the multicap index rebalances regularly. This disciplined rebalancing and fixed allocation to mid- and small-cap stocks are a major reason for its long-term outperformance.