Understanding Diversified Equity Funds
For retail investors seeking broad market exposure, Flexi Cap and Multi Cap mutual funds are popular choices. Both funds invest across large-cap, mid-cap, and small-cap stocks. However, they operate under different regulatory rules regarding asset allocation, impacting their risk profiles and return potential.
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Asset Allocation Rules: Flexi vs. Multi
SEBI guidelines define the distinct rules for each category:
- Multi Cap Funds: Must invest at least 25% of their assets in each of the three market cap segments (25% in Large Cap, 25% in Mid Cap, and 25% in Small Cap). This ensures consistent mid- and small-cap exposure, which can increase volatility but offer higher growth potential.
- Flexi Cap Funds: Have no sector or cap limits. The fund manager can dynamically shift assets (e.g., allocating 80% to large caps during market downturns, or increasing small caps during economic recoveries) based on market outlook.