In mutual funds, diversification plays a crucial role in balancing risk and maximizing returns. One category that offers a structured way of diversifying investments across market segments is the Multi-Cap Fund. Unlike Flexi-Cap Funds, which have no fixed allocation rules, Multi-Cap Funds follow a well-defined structure set by SEBI.
For Indian investors looking for a balanced exposure to large-cap, mid-cap, and small-cap companies, Multi-Cap Funds can be a strong option. In this article, we explain what Multi-Cap Funds are, how they work, and the key advantages and disadvantages you should know before investing.
What Are Multi-Cap Funds?
A Multi-Cap Fund is an equity mutual fund that must invest in all three market-cap segments—large, mid, and small-cap stocks—with a minimum of 25% allocation in each category.
This rule was introduced by SEBI in 2020 to ensure that these funds remain truly diversified across different company sizes.
Allocation Structure (as per SEBI)
- Large-cap stocks → Minimum 25%
- Mid-cap stocks → Minimum 25%
- Small-cap stocks → Minimum 25%
- Remaining 25% → Fund manager’s choice
This structure ensures that the portfolio is not overly tilted toward a single market segment.
How Multi-Cap Funds Work
The fund manager builds a portfolio that includes:
- Stable and established large-cap companies
- Fast-growing mid-cap companies
- High-potential small-cap companies
Because of the compulsory 25% allocation in small-caps, these funds carry moderate to high risk. However, the presence of large-caps helps balance volatility.
These funds are actively managed, meaning the fund manager chooses stocks based on:
- Sector trends
- Company fundamentals
- Market cycles
- Economic outlook
The goal is to achieve long-term capital appreciation through a diversified and balanced portfolio.
Advantages of Multi-Cap Funds
1. True Diversification Across Market Segments
The biggest benefit is mandatory diversification. Unlike Flexi-Cap Funds, Multi-Cap Funds cannot concentrate too heavily in large-caps. This ensures:
- Balanced exposure
- Reduced over-reliance on one category
- Better risk distribution
Diversification helps protect investors during market volatility.
2. Ideal Mix of Stability and Growth
Multi-Cap Funds combine:
- Stability from large-caps
- Growth from mid-caps
- Aggressive returns from small-caps
This blend makes them suitable for investors looking for a balanced yet growth-oriented investment.
3. Long-Term Wealth Creation
Because the fund includes mid and small-cap stocks, long-term return potential is high. With a horizon of 5–7 years, these funds can deliver strong wealth creation.
4. Professional Fund Management
Investors benefit from active fund management, where skilled fund managers analyse sectors and companies and adjust the portfolio based on market conditions.
5. Equity Taxation Benefits
Since Multi-Cap Funds invest majorly in equities, they enjoy equity taxation:
- Long-term capital gains (LTCG) tax: 10% above ₹1 lakh
- Short-term capital gains (STCG) tax: 15%
This makes them more tax-efficient compared to debt-oriented products.
Disadvantages of Multi-Cap Funds
1. Higher Risk Due to Small-Cap Allocation
The compulsory 25% investment in small-cap stocks increases overall portfolio risk. These stocks:
- Are more volatile
- Fall sharply during market corrections
- Take longer to recover
So, Multi-Cap Funds may not suit conservative investors.
2. Not as Flexible as Flexi-Cap Funds
Unlike Flexi-Cap Funds, Multi-Cap Funds cannot change allocations freely. Even if small-caps are overvalued or volatile, the fund must still hold 25% in small-caps. This makes the category less adaptable during tough market phases.
3. Performance Depends Heavily on Market Cycles
During a small-cap rally, Multi-Cap Funds perform extremely well.
During large-cap dominated markets, they may underperform compared to pure large-cap or Flexi-Cap Funds.
4. Higher Volatility
Because of diversified exposure to mid and small-cap stocks, Multi-Cap Funds can experience significant fluctuations in NAV. Investors need to be comfortable with this volatility.
Who Should Invest in Multi-Cap Funds?
Suitable for:
- Investors with a moderate to high risk appetite
- Long-term investors (5–7 years minimum)
- Those seeking balanced exposure across market segments
- Investors who prefer structured diversification
- SIP investors building long-term wealth
Not suitable for:
- Conservative investors
- Short-term investors
- Those who cannot tolerate volatility
Multi-Cap vs Flexi-Cap Funds (Quick Difference)
| Feature | Multi-Cap Funds | Flexi-Cap Funds |
| Allocation requirement | Mandatory 25% each in large, mid, small-cap | No fixed allocation, fully flexible |
| Risk level | Moderate to high | Depends on fund manager |
| Flexibility | Low | High |
| Suitable for | Investors seeking structured diversity | Investors seeking active allocation |
How to Invest in Multi-Cap Funds
1. Choose SIP Over Lumpsum
Because mid and small-cap stocks are volatile, SIP is the best way to average out risk.
2. Compare Funds Before Investing
Check:
- 5-year performance
- Fund manager experience
- Portfolio allocation
- Expense ratio
- Consistency in returns
3. Stay Invested for the Long Term
To enjoy full benefits, stay invested for at least 7 years.
Conclusion
Multi-Cap Funds offer an excellent opportunity for investors seeking a balanced investment that combines stability, growth, and diversification. SEBI’s 25% mandatory allocation ensures true multi-segment exposure, which is beneficial for long-term wealth creation.
However, the involvement of small-cap stocks makes them volatile and suitable mainly for investors with a moderate to high risk appetite. If you’re ready to stay invested long-term and want a well-diversified equity portfolio, Multi-Cap Funds can be a strong addition to your investment strategy.