Why multi-cap funds triumph over flexi caps

A regulatory circular in late 2020 stripped multi-cap funds to their bare bones. Almost overnight, these funds, which had been creating wealth for multiple decades, lost their very definition and freedom. From enjoying the flexibility of investing across companies of all sizes, they were now mandated to have at least 25 per cent of their assets in large-, mid- and small-cap companies. Consequently, 27 of the 35 funds chose to migrate to a newer category, called 'flexi-cap funds', to avoid drastic portfolio changes, leaving only eight funds retaining the multi-cap status. In hindsight, the writing was on the wall. Despite having the flexibility to invest anywhere, the erstwhile multi-cap funds largely took refuge in large-cap companies, earning them the label of 'pseudo large-cap' funds. Hence, the major jolt. Cut to the present day, there have been more than three years of multi-cap funds in their current avatar. Although they are yet to undergo a complete market cycle of five to seven years, we at Value Research believe that three years is a reasonable time frame to begin evaluating a fund category. When we put the repackaged multi-cap funds through the performance wringer, we found them to be tip-top and have a leg-up on their flexi-cap foes, as seen in the above graph. For a direct comparison, we created two portfolios, and here is what we found: The multi-cap fund portfolio earned roughly 2 per cent more returns over the flexi-cap fund portfolio in the last 21 years. While this difference may seem insignificant, the multi-cap portfolio has compounded over time and accumulated nearly 40 per cent more wealth (Rs 4.25 crore vs Rs 3.07 crore). That's an incredible Rs 1.18 crore difference! If you start investing in multi-cap funds at the age of 25, you can earn around 50-70 per cent more wealth by the time you reach 60, your retirement age. Evidently, multi-cap funds have turned their setback into a

This article was originally published on June 15, 2024.