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If you invest in equities for long enough, one thing becomes clear very quickly: no single segment leads the market every year. Large caps do well in some phases, mid caps shine in others, and small caps can swing from stellar to painful within short periods.
That’s why many investors prefer funds that give exposure across market capitalisations instead of betting on just one segment. Flexi-cap and multi-cap funds are designed for exactly this purpose. On the surface, they sound similar. In practice, they behave very differently.
Why diversification across market caps matters
Recent years are a good reminder of why diversification helps. In 2025, large-cap stocks delivered steady returns, mid caps were more muted, and small caps struggled. In other years, the order has been completely reversed.
Since it’s almost impossible to consistently predict which segment will outperform next, spreading exposure helps smooth the journey and improves the odds of sensible long-term returns.
Both flexi-cap and multi-cap funds aim to do this, but they take different routes.
What a flexi-cap fund really does
A flexi-cap fund invests across large-, mid- and small-cap stocks, but without any compulsory allocation to each category. As long as at least 65 percent of the portfolio is in equities, the fund manager is free to decide where the money goes.
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This flexibility is the key feature.
If the fund manager believes large caps are safer or better valued, the portfolio can tilt heavily in that direction. If mid and small caps look attractive, exposure can be increased there instead. The allocation can change meaningfully over time as market conditions and valuations shift.
In other words, with a flexi-cap fund, you are trusting the fund manager to actively move money between market-cap segments.
How multi-cap funds work differently
Multi-cap funds follow stricter rules. They must invest at least 75 percent of their assets in equities, with a minimum of 25 percent each in large-cap, mid-cap and small-cap stocks at all times. The remaining 25 percent is flexible.
This structure ensures constant exposure to all three segments, regardless of market conditions. Even if small caps are expensive or volatile, the fund still needs to maintain that minimum allocation.
The upside is balance. The downside is limited flexibility.
Why this difference matters in real life
In a flexi-cap fund, the fund manager can actively reduce exposure to overheated segments and move to safer or better-valued areas. This can help manage risk during frothy phases, but it also means returns depend heavily on the manager’s judgement.
In a multi-cap fund, allocation discipline is built in. You always stay diversified, but the fund cannot fully step away from a struggling segment even if valuations look stretched or risks are rising.
This is why multi-cap funds can feel more volatile during sharp small-cap corrections, while flexi-cap funds may appear relatively calmer in the same phase.
What the return numbers tell you — and what they don’t
Category-level data shows that multi-cap funds have delivered stronger returns than flexi-cap funds over some longer periods. But this doesn’t mean multi-cap funds are always better.
Individual fund performance varies widely. A well-managed flexi-cap fund can outperform many multi-cap funds, and vice versa. What matters more is whether the fund’s structure matches your comfort with risk and your expectations from the fund manager.
Past returns are useful for context, not decision-making on their own.
Which one should you choose?
Both flexi-cap and multi-cap funds are equity-heavy and suit investors with a long-term horizon, ideally five years or more.
A flexi-cap fund may suit you if you are comfortable letting the fund manager make allocation calls and are okay with the portfolio looking very different from year to year. This works better for investors who trust active decision-making and can live with periods of underperformance.
A multi-cap fund may suit you if you want built-in diversification across market caps at all times and prefer a more rule-based structure. You accept that the fund will always have exposure to all segments, even during tough phases.
The bottom line
Flexi-cap and multi-cap funds are not competing products so much as different philosophies.
One relies on flexibility and fund manager judgement. The other relies on discipline and balance. Neither is inherently superior. The right choice depends on how much control you want the fund manager to have, how comfortable you are with volatility, and how patiently you can stay invested through market cycles.
If you understand what each fund is designed to do, choosing between them becomes much simpler.