Over the years, flexi-cap funds have emerged as one of the most popular equity mutual fund categories because of their flexibility to invest across large-, mid-, and small-cap stocks.
However, a “Thinking Aloud” report by Axis Mutual Fund argues that this flexibility has, in practice, resulted in a persistent bias towards large-cap stocks, limiting participation in broader market rallies.
According to the report, multi-cap funds, which are mandated to invest at least 25% each in large-cap, mid-cap, and small-cap stocks, have maintained a more balanced portfolio structure. This has helped them participate more consistently in the broader market rally over the past few years.
Flexi-cap funds remain tilted towards large caps
According to the report, the key attraction of flexi-cap funds has always been their flexibility to move across market capitalisations in response to investment opportunities. However, most portfolios have continued to maintain a dominant allocation towards large-cap companies.
The report mentioned that this preference is understandable because large-cap stocks offer better liquidity, greater stability, and relatively lower risk during uncertain market conditions.
Flexi-cap category allocation (%)
| Year | Large Cap | Mid Cap | Small Cap |
| Mar-22 | 66 | 16 | 11 |
| Mar-23 | 66 | 17 | 11 |
| Mar-24 | 61 | 18 | 15 |
| Mar-25 | 60 | 18 | 16 |
| Mar-26 | 61 | 18 | 15 |
*Source: Axis Mutual Fund
Category allocation data shows that flexi-cap funds have consistently maintained around 60% or more exposure to large-cap stocks over the past five years.
Multi-cap funds maintain a more balanced allocation
The report highlighted that multi-cap funds follow a structurally different approach because regulations require them to remain invested across all three market-cap segments.
Large-cap exposure in the category gradually declined from 42% in March 2022 to 40% in March 2026, while allocations to mid- and small-cap stocks remained significantly higher than those of flexi-cap funds throughout the period.
Multi-cap category allocation (%)
| Year | Large Cap | Mid Cap | Small Cap |
| Mar-22 | 42 | 26 | 25 |
| Mar-23 | 42 | 25 | 25 |
| Mar-24 | 41 | 26 | 28 |
| Mar-25 | 41 | 26 | 27 |
| Mar-26 | 40 | 27 | 28 |
*Source: Axis Mutual Fund
By staying invested across large, mid and small-cap segments, multi-cap funds have been better positioned to benefit from a broader market upcycle.
The Nifty 500 Multicap 50:25:25 TRI, the benchmark for multi-cap funds, delivered 15.3% annualised returns over three years and 14.2% over five years. (Returns as of 30 June, 2026)
In comparison, the Nifty 500 TRI, the benchmark widely used by flexi-cap funds, generated 12.9% and 12.4%, respectively, over the same periods.
Over the one-year period, the Nifty 500 Multicap 50:25:25 TRI declined 0.6%, while the Nifty 500 TRI fell 1.7%.
“When markets broaden, a portfolio that is already invested across segments does not have to ‘shift’ to participate—it is already there,” the report mentioned.
Portfolio structure reduces the need for tactical allocation calls
The report observed that one of the biggest challenges for investors is deciding when to increase or reduce exposure to different market-cap segments.
“Multicap funds ensure that investors remain invested across segments through market cycles, without the need for frequent tactical adjustments,” as per the report.
Investor inflows continue to favour flexi-cap funds
Despite stronger positioning and benchmark performance, investor inflows continue to remain skewed towards flexi-cap funds, which still account for a much larger share of assets under management.
The report attributed this trend to investor familiarity. “In investing, familiarity often drives decision-making. Investors tend to stay with categories they are comfortable with, even when market conditions begin to favour alternative approaches.”
Multi-cap funds are gradually gaining relevance
The report concluded that as market leadership becomes broader and opportunities emerge across large, mid and small-cap companies, the emphasis may gradually shift from flexibility to consistency in portfolio construction.
It added that while flexi-cap funds are likely to remain relevant, particularly during periods when market leadership is concentrated. However, multi-cap funds could become increasingly important for long-term investors seeking sustained exposure across the broader equity market.
Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.