Index vs Flexi-cap vs Multi-cap funds: Where to invest today

Market corrections often leave investors questioning their investment choices. Should they stay with a low-cost index fund, rely on the flexibility of a flexi-cap fund or embrace the structured diversification of a multi-cap fund?

While all three fund categories offer long-term growth, their characteristics vary.

This article breaks down the fundamental differences between index, flexi-cap and multi-cap funds to help investors make an informed decision.

Index funds: The passive, low-cost route

Index funds track a benchmark index such as the Nifty 50 or Sensex and aim to replicate market returns with minimal costs. Since these funds are passively managed, they do not attempt to outperform the market and just look to match such indices's returns.

For instance, over the last five years, since the Sensex has delivered a 19.7 per cent compounded annual growth rate (CAGR), the index funds tracking the Sensex would also deliver returns in that range, albeit a few decimal points lower.

While index funds eliminate the risk of poor fund management, they also lack the potential for excess returns during strong market phases.

Flexi-cap funds: Actively managed with no restrictions

Flexi-cap funds allow fund managers to invest across large-, mid-, and small-cap stocks without fixed allocation rules. This flexibility provides an opportunity to shift assets based on market conditions, although many flexi-cap funds have a significant tilt towards large caps. As of February 2025, flexi-cap funds have a 72 per cent allocation to large caps.

Performance-wise, flexi-cap funds have done well, generating an annualised return of 21 per cent in the last five years.

Multi-cap funds: Diversified but more volatile

Unlike flexi-cap funds, multi-cap funds are required to allocate at least 25 per cent each to large-, mid-, and small-cap stocks. This ensures broad diversification but also increases exposure to mid- and small-cap stocks, which are more volatile than large caps.

During bull markets, multi-cap funds tend to go up more, as mid- and small-cap stocks outperform. However, in market downturns, they experience steeper declines due to their mandatory exposure to these riskier segments.

Since the multicap category was formally announced in late 2020, there isn't sufficient history for a five-year comparison. However, over the last three years, multi-cap funds have delivered an annualised return of 15 per cent, compared to 12 per cent for flexi-cap funds and 9 per cent for the Sensex (a stand-in for index funds).

Performance during upswings and downswings

We also looked at how these three fund categories have performed during good times and bad since 2021. That's important because you'd understand how they fare during different market cycles.

Here's what we found: Multi-cap funds tend to outperform when markets rise, but fall harder in corrections due to their mid- and small-cap exposure.

For instance, during the April 2021 - October 2021 rally, multi-cap funds gained 28.5 per cent, the highest among all categories. However, in the November 2024 - February 2025 downturn, they also fell the most, declining 15.5 per cent.

Which fund type is right for you?

Given how each of these funds deal with upswings and downswings, choosing the right fund depends on your investment style and risk tolerance, rather than current market conditions.

Final thought

Just to reiterate, choosing between index, flexi and multi-cap funds depends on your risk appetite and investment horizon, rather than reacting to market fluctuations.

Also read: Debt mutual fund with 22% return! Should you invest?