Investors in India are showing a clear and renewed preference for flexi-cap mutual fund schemes, pouring significant money into this category in recent months. Data reveals that from May to November 2025, flexi-cap funds accounted for a substantial 28.7% of the total net inflows into diversified equity mutual fund categories. This decisive shift in investor sentiment comes at a pivotal time in the market cycle.
The Valuation Shift Driving Investor Preference
The timing of this surge is not coincidental. It aligns with a major shift in market leadership and valuation comfort. After a prolonged rally that saw mid- and small-cap stocks deliver outsized returns, the spotlight is now turning back towards large-cap stocks. Analysts point out that large-cap stocks are currently trading at reasonable, even discounted, levels compared to their historical averages.
Sriram BKR, Senior Investment Strategist at Geojit Investments, provided concrete data: large-caps are trading at a 6-7% discount to their 10-year average valuations. In stark contrast, small-caps trade at a 12% premium, mid-caps at a 20.7% premium, and micro-caps at a steep 38% premium. This valuation divergence has made investors cautious about indiscriminate exposure to the broader market, prompting a rebalancing act towards more stable, large-cap-oriented investments.
Flexi-Cap Funds: Built for Flexibility in a Shifting Market
Flexi-cap funds are structurally positioned to capitalize on this environment. Unlike their multi-cap counterparts, they are not bound by rigid minimum allocation rules. A flexi-cap fund must only maintain a minimum of 65% allocation to equities, with complete freedom to distribute the rest across large-, mid-, and small-cap stocks as the fund manager sees fit based on valuation and market outlook.
This flexibility has resulted in a consistent large-cap bias. Portfolio analysis from January 2021 to November 2025 shows flexi-cap funds held over 60% in large caps in 32 out of 59 months, with an average allocation of 61.36%. Experts like Anup Bhaiya, founder of Money Honey Financial Service, note that this tilt helps reduce portfolio volatility, making flexi-cap funds ideal for core portfolios.
Scale also influences this bias. With giants like the Parag Parikh Flexi Cap Fund (₹1.29 lakh crore AUM) and HDFC Flexi Cap Fund (₹94,000 crore AUM), excessive exposure to smaller, less liquid stocks becomes a practical challenge, further reinforcing the large-cap focus.
Multi-Cap Funds: The Discipline of Mandated Diversification
Multi-cap funds operate under a very different, more disciplined framework. As per regulations, they must invest a minimum of 25% each in large-, mid-, and small-cap stocks, with only the remaining 25% left to the manager's discretion. This rule was designed to enforce genuine diversification across market capitalizations and prevent funds from behaving like large-cap schemes in disguise.
This discipline has historically paid off in terms of returns. From 2021 to 2024, multi-cap funds outperformed flexi-cap funds in every calendar year. It was only in 2025 that flexi-cap funds began to pull ahead, aided by their heavier large-cap exposure during the valuation shift. Vinayak Magotra of Centricity WealthTech points out that the combined 50% exposure to mid and small caps has helped multi-caps generate higher returns during broad-based rallies.
However, the same mandate can become a constraint. Jiral Mehta of FundsIndia explains that it can limit a manager's flexibility during times when valuations in a particular segment, like small-caps, become excessively stretched or when market leadership is narrow.
Performance Under Pressure: Flexibility vs. Discipline
The core difference between the two categories becomes most evident during market corrections. Since January 2021, during two sharp drawdowns of over 15% in the Nifty 500 index, flexi-cap funds demonstrated more consistent downside protection.
Rajat Chandak, Senior Fund Manager at ICICI Prudential Mutual Fund, clarifies that flexi-cap funds can tilt towards higher-quality large caps or defensive stocks when risk rises. Multi-cap funds, bound by their 25% minimums in each segment, cannot reduce exposure to more volatile segments below mandated levels, which can sometimes lead to deeper short-term drawdowns.
The Verdict: It's About Investor Objective, Not Just Returns
Despite the recent performance divergence and massive inflows, experts caution against declaring a clear winner. The categories, since SEBI's reclassification, lack a long enough common track record across full market cycles to make definitive judgments.
The consensus is that category selection must start with the investor's objective. Flexi-cap funds are suited for investors seeking relatively stable portfolios with lower volatility, leveraging manager flexibility. Multi-cap funds are oriented toward investors targeting potentially higher long-term returns, accepting higher volatility for the sake of enforced diversification.
As Anup Bhaiya summarizes, over the long term, returns may converge, with multi-caps theoretically capable of generating 1-2% higher returns. The real test for both will play out as market cycles turn and valuations reset once again.
