UTI MF’s Multi Cap Fund debuts — but should investors still choose flexi-caps over multicaps?

UTI Mutual Fund has launched its latest offering, the UTI Multi Cap Fund. This open-ended equity scheme will invest across large-cap, mid-cap, and small-cap stocks, providing diversified exposure to investors.

The New Fund Offer (NFO) begins on April 29, 2025, and will close on May 13, 2025. Investors can participate with a minimum investment of Rs 1,000, with subsequent investments in multiples of Rs 1. The fund aims to offer a balanced portfolio by maintaining at least 25% allocation in each market segment, ensuring diversification across company sizes, sectors, and investment styles through its single portfolio approach. 

The UTI Multi Cap Fund will employ a blend strategy, targeting sustainable businesses and firms with robust fundamentals at reasonable valuations. It will also look for turnaround opportunities. A bottom-up stock selection approach will be followed, supported by UTI’s proprietary Score Alpha research framework, which evaluates companies based on operating cash flows and return ratios. This active management approach might lead to a higher portfolio turnover, as the fund will adjust allocations dynamically to align with changing market conditions. 

Multi Cap vs. Flexi Cap funds: Which is more attractive now?

Multicap Funds:

Structure: Mandated to allocate at least 25% each to large-cap, mid-cap, and small-cap stocks.

Advantages: Ensures diversification across market caps, potentially capturing growth in various segments.

Risks: Fixed allocations may expose investors to higher volatility, especially from mid and small-cap segments during market downturns.​

Flexicap Funds:

Structure: No fixed allocation; fund managers have the flexibility to invest across market caps based on prevailing market conditions.

Advantages: Allows dynamic adjustment of the portfolio, potentially reducing risk during volatile periods.

Risks: Performance heavily depends on the fund manager's decisions; may underperform if market timing is off.​

Performance Comparison: Over the past three years, multi-cap funds have delivered an average annualised return of 15%, while flexi-cap funds have returned around 12%. However, during market downturns, multi-cap funds experienced steeper declines due to their fixed exposure to more volatile mid and small-cap stocks.​

In the current investment landscape, multi-cap funds offer diversification but face structural constraints. "Multi-cap funds have a structural constraint, with 75% of the portfolio locked equally across large-, mid-, and small-cap stocks, leaving limited room for tactical asset allocation. While this ensures diversification, it limits the fund manager’s ability to navigate market risks and opportunities. On the other hand, flexi-cap funds offer complete freedom to allocate across market caps in any proportion. This flexibility allows fund managers to dynamically shift portfolios based on market conditions, company performance, and macroeconomic trends," said Ash Sedani, Assistant Vice President, Investment Strategy at 1 Finance. 

Comparatively, flexi-cap funds have demonstrated strong performance, with an annualised return of 21% over the last five years. These funds offer fund managers the flexibility to capitalise on specific market trends without allocation restrictions, potentially leading to higher returns but also increased risk. In contrast, multi-cap funds, which formally began in late 2020, have posted an annualised return of 15% over the last three years.  This return is higher than the 12% offered by flexi-cap funds and the 9% from the Sensex over the same period.

In bullish markets, multi-cap funds may outperform due to mid- and small-cap stock rallies, yet they can suffer steeper declines during downturns due to mandatory exposure to riskier segments. 

As per experts, moderate risk-takers who believe in active management may find Flexi-cap Funds suitable. These funds offer dynamic allocation across market caps and balance growth potential flexibly.

Aggressive investors with a long-term view may be interested in Multi-cap Funds. These funds have the potential for higher returns in bull markets, but investors should be prepared for higher volatility during market corrections.

Index funds are recommended for conservative equity investors seeking low costs and steady returns. These funds are ideal for those looking for predictability and to minimize fund manager risk.

How equity fund categories performed across market phases

Source: Value Research