The two best mutual funds for your long-term portfolio

Summary: For a long time, flexi-cap funds were our go-to recommendation for long-term investors. But there’s been a quiet rethink at Value Research. In a recent podcast, our CEO Dhirendra Kumar put it plainly: “A few years ago, I’d have said flexi-cap funds are the best long-term choice. But not anymore.” So, which funds is he backing now? Let’s find out.

For years, flexi-cap funds have been the default recommendation for long-term investors. And with good reason.

They’re diversified, market-cap agnostic and highly adaptable, since they give fund managers the freedom to move money between large-, mid- and small-cap stocks depending on where opportunities lie.

That flexibility has paid off handsomely. As of September 2025, over Rs 5 lakh crore is invested in flexi-cap funds, more than in any other equity category. The country’s two largest equity funds — Parag Parikh Flexi Cap and HDFC Flexi Cap, with total corpus of around Rs 1.19 lakh crore and Rs 85,500 crore, respectively — belong here.

But lately, there’s been a quiet rethink.

In a widely-viewed podcast posted four months back, Dhirendra Kumar, CEO of Value Research, offered a surprising twist to the old wisdom: “A few years ago, I’d have said flexi-cap funds are the best long-term choice. But not anymore. The best choice right now seems to be multi-cap funds.”

Why the shift?

When flexibility becomes a constraint

Flexi-cap funds were designed for freedom, but some have grown so large that their flexibility is now limited.

With their massive asset size, these funds find it hard to take meaningful positions in smaller companies. What this means is that big funds manage thousands of crores of rupees, so even buying a small stake in a small company could mean owning too much of that company’s total shares, which is risky and hard to sell later.

So, even if a small-cap stock looks promising, it’s tough for big funds to take a meaningful position without distorting the stock’s price or liquidity.

That’s why large funds usually stick to bigger, more liquid companies, where they can invest large sums smoothly.

As a result, 60 to 70 per cent of investor money in flexi-cap funds now sits in large-cap stocks, leaving only a modest slice for mid and small caps.

In short, most flexi-cap funds today look a lot like large-cap funds.

The rise of multi-cap funds

Multi-cap funds, on the other hand, operate with a clear mandate. They must invest at least 25 per cent each in large-, mid- and small-cap companies.

This mandate means multi-cap funds can’t over-concentrate in large caps. That’s because even if the fund manager is gun shy, at least 50 per cent of the investor’s money is invested in mid and small caps.

Sure, that mix makes them a tad more volatile. The average three-year standard deviation (a measure of volatility) for multi-cap funds is 13.8 per cent, compared to 12.95 per cent for flexi-cap funds. But that’s the trade-off for potentially better long-term returns.

And the numbers back it up. Over the last three years, multi-cap funds have delivered 19.7 per cent annualised returns, compared to 17 per cent for flexi-cap funds.

Put another way, if you had invested Rs 1 lakh three years back, your investment would have grown to Rs 1.71 lakh in a multi-cap fund versus Rs 1.59 lakh in a flexi-cap fund.

The case for value funds

But the conversation doesn’t end there.

In the same podcast, Dhirendra Kumar added another long-term candidate to the mix: “Over and above, if there’s another long-term fund I would choose, it’s a value fund.”

Value funds take a contrarian approach. These funds hunt for undervalued stocks that are temporarily out of favour but have strong fundamentals. Unlike growth stocks, which command premium valuations (high P/E and P/B ratios), value funds bet on companies whose prices don’t fully reflect their intrinsic worth.

And their contrarian stance has helped them quietly outperform.

• Three-year average returns: 20.5 per cent (more than flexi-cap funds’ 17 per cent and multi-cap funds’ 19.7 per cent)
• Five-year average returns: 23.5 per cent, which is higher than flexi-cap funds’ 20.1 per cent over the same five-year period. However, it’s worth noting that the multi-cap category itself was launched only in November 2020, so it doesn’t yet have a full five-year performance record.

So, how do you choose the right multi-cap and value fund?

Currently, there are 25 actively managed value and contra funds, including two five-star and six four-star funds as per Value Research Ratings. Meanwhile, in the multi-cap world, there are 27 actively managed multi-cap funds, with one five-star fund and four four-star performers.

While our ratings are a great starting point, you should go beyond the stars. When picking the right funds, focus on those that have consistently outperformed their benchmarks over three to five years. Look for steady rolling return, which is a sign of true consistency rather than lucky streaks.

But if you want to skip the legwork, let us help.

Explore Value Research Fund Advisor — a personalised guide to building a winning mutual fund portfolio. It doesn’t just list top-rated funds; it helps you choose the right ones for your goals, time horizon, and risk appetite.

Backed by decades of independent analysis and a data-rich framework, it helps you focus on growing your wealth steadily and smartly.

Visit Fund Advisor today

Also read: The second fund most long-term investors should have