Flexi-cap vs multi-cap funds: Which offers better diversification and returns? What the data shows

Flexi-cap mutual funds, often called go-anywhere funds, can invest across large-, mid- and small-cap stocks, which is why they are seen as offering broad diversification. Multi-cap funds are often considered an alternative, as they also invest across market caps but in a structured way. Both categories spread money across market caps, but their mandates and approaches set them apart.

So has the flexible approach delivered better returns? We compare the top funds in each category, looking at their market-cap allocations and returns.

Here are the top 10 flexi-cap funds by assets under management (AUM), with their asset allocations and returns.

Source: Rupeevest

How these funds performed over 1, 3 and 5 years:

Most flexi-cap funds have put nearly 60% of their AUM in large-cap stocks, which may limit their ability to generate higher returns. Most funds have delivered negative returns over the past year, and the category average is -3.68%. Over three and five years, the category average is 9.34% and 8.13%, respectively.

Himanshu Srivastava, Principal, Manager Research at Morningstar Investment Research India, says the freedom to change market-cap allocations can be a real advantage for flexi-cap funds, especially when markets are uncertain.

“Managers can increase exposure to relatively liquid and established large-cap companies while reducing exposure to segments where valuations appear stretched, or risks are elevated. Multicap funds have comparatively limited flexibility due to their mandatory mid- and small-cap allocations, which can leave them more exposed to segments that experience sharper corrections. However, flexibility should not automatically be equated with superior downside protection,” Srivastava told Livemint.

“Not all Flexi Cap managers actively change their market-cap allocations; some maintain relatively stable exposures based on their investment philosophy,” he added.

Here are the top 10 multi-cap funds by AUM, with their asset allocations and returns.

Note: As some multi-cap schemes have not yet completed five years, the data considers 1-year and 3-year returns.

Most multi-cap funds hold between 35% and 45% in large-cap stocks, which makes them less tilted towards large caps than flexi-cap funds. The category’s average return was -0.60% over one year and 11.22% over three years, higher than the flexi-cap averages for both periods.

M-cap diversification vs portfolio diversification: According to Morningstar’s Srivastava, diversification across market capitalisations does not necessarily translate into better overall portfolio diversification. “Factors such as sectoral exposure, stock concentration, investment styles, underlying business risks, and correlations between holdings are equally important. For instance, a fund may be diversified across market-cap segments but remain concentrated in sectors or businesses exposed to similar economic risks. Therefore, while Multi Cap funds offer diversification across market-cap segments by mandate, Flexi Cap funds can be equally well-diversified depending on how effectively the portfolio is constructed.”

The volatility factor: Multi-cap funds offer more consistent participation across market-cap segments, which can work in their favour during broad-based market rallies, particularly when mid- and small-cap stocks outperform large-caps. “Mid- and small-cap stocks generally carry higher liquidity risks and tend to experience sharper corrections during periods of market stress. Since Multi Cap funds must maintain at least 25% exposure to each of these segments, their ability to reduce these risks through market-cap allocation changes is relatively constrained,” Srivastava told Livemint.

The real diversification: According to Srivastava, diversification should also be assessed at the investor's overall portfolio level. Someone already holding dedicated mid- and small-cap funds may find a large-cap-oriented Flexi Cap fund more complementary. Conversely, an investor seeking sustained exposure across all market-cap segments through a single fund may prefer the Multi Cap structure, provided they are comfortable with the associated volatility, he opined.

What you should do: For long-term investors, diversification should be evaluated holistically rather than solely through market-cap allocation or performance during bear markets.

Market-cap allocation provides an indication of where a fund invests, but does not fully capture its underlying portfolio risks. A defensively positioned fund may protect capital better during corrections but could also lag during subsequent market recoveries. Ultimately, the choice should be guided by the investor's risk appetite, investment horizon, existing portfolio exposures, and investment objectives rather than the perceived superiority of either category, Morningstar’s Principal Manager Research noted.

Devansh Sharma

Devansh Sharma is Deputy Editor at Mint (Digital), where he leads newsroom operations and helps shape the website's editorial strategy. With nearly 15 years of experience in business journalism, he specialises in business, personal finance, stock markets, mutual funds, and economic developments, while also covering geopolitics and major breaking news. During his tenure at Mint, which spans nearly two years, he has led planning and coverage of key news events, including the Union Budget, RBI monetary policy announcements, US Federal Reserve decisions, elections, and major international developments.<br><br> Devansh holds a Master's degree in Journalism & Mass Communication from the School of Communication Studies, Panjab University. Before rejoining Mint, he worked with leading business news organisations, including The Economic Times, Moneycontrol, and ET Money. At ET Money, he served as Senior Investor Educator, where he created educational content to help readers better understand investing, mutual funds, and personal finance. Throughout his career, he has focused on making complex business and financial developments accurate, accessible, and relevant for a broad audience.

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