In the last few years, mutual funds have become one of the most popular investment instruments. Mutual funds are preferred by investors due to the higher returns they offer compared to other investment options. The flexibility and long-term investment options also helps investors to build wealth with small investments in mutual funds.

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However, when investing in mutual funds, one has to comprehend how to invest effectively to make the best choices and create a perfect portfolio. Those investors, who are looking for higher returns, may opt for equity funds.

Equity mutual funds are broadly classified as multi-cap funds and flexi-cap funds. These mutual funds predominantly invest in equity shares, but there are many differences in terms of risks, gains and tax benefits.

Let's know the differences between the two. 

What are Multi-Cap Funds?

The multi-cap funds are those categories of mutual funds which invest in equity stocks and equity-related assets across companies in different sectors. The multi-cap funds invest across small-cap, mid-cap and large-cap companies. The diversified investment could be an ideal choice to mitigate risk to some extent.   

 What are Flexi-cap Funds?

The flexi-cap funds are an open-ended dynamic equity scheme that makes investments in companies of all sizes across sectors. A minimum of 65 per cent of the scheme's total assets are invested in equity instruments and not subject to market-cap limits, according to SEBI guidelines. Unlike the multi-cap funds, the mutual funds are free to determine their asset allocation across small-cap, mid-cap and large-cap companies in different sectors.

Difference between Multi-Cap and Flexi-Cap Funds

Equity exposure: Multi-cap funds require a minimum of 75 per cent in equities meaning at least 3/4th of the scheme's total assets must be invested in equity and equity-related instruments, whereas flexi-cap funds require a minimum of 65 per cent in equities. 

Market cap: While multi-cap funds are required to have a minimum of 25 per cent allocation of their portfolio to large-cap, mid-cap and small-cap companies, flexi-cap funds are free to invest in any market cap, without having a set percentage of allocation. 

Gains: Multi-cap funds have a unique area of expertise as all the large-cap, mid-cap, and small-cap investments are available. Also, the long-term risk is lower in this case. On the other hand, flexi-cap funds have a lower risk of market volatility. It is also a good plan for small investors and it offers the benefit of higher returns with low to moderate risks.

Risks: As Multi-Cap funds invest in the stocks of large-cap, mid-cap, and small-cap corporations, the plans are riskier than large-cap plans. On the other hand, Flexi-Cap funds offer exposure to a wide range of equity securities, which could result in a portfolio with a strong mix of stocks that produces moderate returns. 

Tax implications: In the case of Multi-Cap Funds, the gains on the investments are considered short-term capital gains (STCG) and thus are subject to a 15 per cent tax if they are sold within a year. Further, the gains on any Multi-Cap investment held for more than a year are taxable under long-term capital gains (LTCG). The gains up to Rs 1 lakh are exempt from taxes, while the gains over one lakh rupees are subject to a 10 per cent tax.

In the case of flexi-cap funds, the returns on investment are subject to both short-term and long-term capital gains.