Multicap mutual funds have delivered higher returns than flexicap funds over the past three and five years. This performance difference is largely driven by their mandatory investment structure, which requires a balanced mix of large, mid, and small-cap stocks.
Recent data shows that multicap mutual funds have outperformed flexicap funds over three- and five-year periods. While flexicap funds are often marketed for their ability to shift money between different company sizes based on market conditions, multicap funds have demonstrated a stronger performance trend recently.
The primary reason for this difference appears to be the mandatory portfolio structure of multicap funds. According to industry data, multicap schemes must invest at least 25% of their corpus each in large-cap, mid-cap, and small-cap stocks. This setup forces these funds to maintain exposure to mid- and small-sized companies, even when large-cap stocks might be more stable.
In contrast, while flexicap funds have the freedom to invest across any market capitalization, historical data indicates they have consistently kept more than 60% of their portfolios in large-cap stocks over the last five years. This strategy often makes their performance more closely aligned with large-cap indices like the Nifty 500, rather than the broader market.
Impact of Market Rallies on Returns
The performance gap has become more noticeable during market phases where mid- and small-cap stocks have rallied. Because multicap funds are structurally required to keep a significant portion of their assets in these segments, they have been able to capture gains from the broader market upswing. Flexicap funds, by remaining heavily weighted toward larger companies, often miss out on the sharper rallies typically seen in the mid- and small-cap space.
Investors should note that while this structure has been beneficial in recent years, it also carries different risks. A portfolio with a higher allocation to mid- and small-cap stocks generally experiences higher volatility compared to a large-cap-heavy portfolio. If the market environment shifts and large-cap stocks perform better than smaller ones, the mandatory mid- and small-cap allocation in multicap funds could act as a drag on overall performance.
When evaluating these funds, it is important to look beyond just the past returns. Investors should check their own risk tolerance and investment goals. A multicap fund provides consistent exposure to all three market segments, which works well for investors seeking broader market participation. A flexicap fund, however, offers a different proposition where the fund manager decides the allocation, potentially providing more stability during market downturns if they choose to shift toward larger, safer companies.
The key monitorable for investors going forward is how these funds handle different market cycles. Future performance will depend on whether mid- and small-cap segments continue to grow at a faster pace than the large-cap space, or if a shift in market leadership changes the current performance advantage.