Multi Cap Vs Multi Asset Allocation Fund: Differences and Which is More Suitable?

Posted On: 21 February 2025

Mutual funds are known for their diversified and professionally managed portfolios. However, some mutual fund categories provide broader diversification than others. Multi cap funds and multi asset allocation funds are two such types.

Multi-cap funds are equity funds that are diversified across market capitalizations – they invest in large, mid and small-cap stocks. Multi asset allocation funds are hybrid funds that diversify across asset classes – typically, equity, debt and a third asset category such as commodities.

Both offer varied exposure but have key differences in risk profiles and return potential. Read on to learn more about the differences between multi cap funds and multi asset allocation funds.

Table of contents

Defining multi-cap mutual funds
Understanding multi-asset allocation funds
Comparing the core differences
Multi-cap funds vs multi asset allocation funds
Risk, returns, and tax implications compared
Investment strategies and flexibility: Multi cap vs multi asset allocation fund
Which fund is better?
Who should invest in multi cap funds vs multi asset allocation funds?

Defining multi-cap mutual funds

A multi-cap mutual fund invests a minimum of 25% each in large, mid and small-cap stocks. The remaining 25% can be allocated in any market cap based on market conditions and the fund’s investment strategy. Fund managers may also choose to invest a small portion in fixed income instruments such as bonds or money market securities to mitigate risk.

The primary benefit of multi-cap funds is diversification across market caps to balance risk and return potential. Large caps provide relative stability to the portfolio, while mid and small caps allow better long-term return potential.

Multi-cap funds carry high risk since a significant portion is allocated to small and mid caps. However, the presence of large caps can result in lower volatility compared to pure mid and small cap funds.

Understanding multi-asset allocation funds

Multi-asset allocation funds invest across various asset classes like equity, debt, gold, etc. based on changing market conditions. SEBI mandates that these funds invest in at least 3 asset classes, with a minimum allocation of at least 10% in each.

Multi asset allocation funds aim to optimise returns for investors by tactically and dynamically shifting allocations between various asset classes while also curbing risk through diversification across these asset classes.

Their key benefit is this flexibility to alter the asset mix based on market outlook. This allows them to manage risk by diversifying across asset classes with varying risk profiles.

For example, when equity markets are subdued, the fund manager can reduce equity exposure and increase allocations to debt, gold or cash equivalents to mitigate downside risk. When equity markets seem favourable, exposure to stocks can be increased to benefit from their upside potential.

As a result, multi-asset allocation funds tend to have a lower risk profile than pure equity funds and better return potential than pure debt funds. However, most multi asset allocation funds maintain a typical asset allocation range. For instance, a multi-asset allocation fund may seek to maintain an equity allocation of more than 65% to tap into long-term growth potential and better tax rates than debt-oriented funds.

Comparing the core differences

Asset mix - Multi-cap funds invest entirely in equities across market capitalisations. On the other hand, multi asset allocation funds invest across asset classes like equity, fixed income, gold, cash equivalents etc.
Flexibility – Being dynamically managed, multi asset funds have greater flexibility to alter their asset allocation based on market conditions. In contrast, multi-cap funds have less flexibility as they must stay within the 25% allocation limit specified for each market cap segment. So, at least 75% of the portfolio must follow set guidelines.
Volatility - Given their debt and gold allocations, multi asset allocation funds generally have lower volatility compared to multi cap and other equity focused funds.
Returns - In bull market phases, multi cap funds can generate higher returns compared to multi asset allocation funds owing to greater for equity exposure. But in bear markets, multi asset funds may tend to mitigate risk more than mid cap funds owing to the dynamic allocation and presence of multiple asset classes.

Multi-cap funds vs multi asset allocation funds

Now let us do a detailed feature-by-feature comparison of multi-cap funds and multi asset allocation funds.

Category	Multi Asset Funds	Multi Cap Funds
Risk profile	• Generally lower risk due to diversification across equity, debt, gold, silver, or other asset classes. • Actual risk depends on equity allocation — the higher the equity portion, the higher the risk. • Fixed income and commodities component helps reduce volatility and may potentially cushion the impact of market shocks.	• Higher risk because they invest primarily in equities. • Riskier than large cap funds because they include mid and small cap segments, which carry higher volatility. Large cap component potentially mitigates some risk compared to pure mid cap or small cap funds.
Investment horizon	• Equity-heavy multi-asset funds benefit from longer horizons. • Can also suit moderately long investment periods due to diversification benefits.	• Suitable for longer holding periods due to higher equity risk. • Suited for investment horizons of 5+ years for potential capital appreciation.
Expenses	• Tend to have higher expense ratios because they require dynamic management and expertise across multiple asset classes.	• May have comparatively lower expense ratios, but still higher than that of passive funds.
Flexibility	• More flexibility due to dynamic allocation across multiple asset classes.	• Less flexible due to SEBI’s rule requiring minimum 25% allocation each in large, mid, and small caps.

Risk, returns, and tax implications compared

Both the funds may contribute to long-term wealth creation, but with differing risk levels and tax implications.

Parameter	Multi cap fund	Multi asset allocation fund
Risk profile	High, as over 65% of the portfolio remains in equities. Though diversified across market caps, it remains equity-heavy and sensitive to market volatility.	Moderate to high, depending on the proportion of equity. Exposure to debt and commodities may offer relatively stable diversification benefits.
Return potential	High long-term potential due to full equity exposure, but subject to market fluctuations and valuation cycles.	Relatively balanced potential returns, as multiple asset classes may reduce volatility while moderating growth potential compared to pure equity funds.
Tax treatment	Classified as an equity fund (more than 65% in equity). Long-term capital gains above ₹1.25 lakh are taxed at 12.5%; short-term gains at 20%.	Taxed based on dominant asset class. If equity exposure exceeds 65%, it is taxed as an equity fund; otherwise, it is treated as a debt fund, with gains taxed as per income slab.
Investorsuitability	May be suitable for investors seeking long-term equity exposure with diversification across market caps.	May be suitable for investors preferring exposure to multiple asset classes with relatively balanced risk and returns.

Investment strategies and flexibility: multi cap vs multi asset allocation fund

Multi cap funds focus on flexibility within equity categories, while multi asset allocation funds offer cross-asset flexibility to manage risk and enhance diversification over market cycles.

Parameter	Multi cap fund	Multi asset allocation fund
Investment strategy	Invests across large cap, mid cap, and small cap equities, with at least 25% in each category as mandated by SEBI. The fund manager actively shifts the remaining allocation within these segments based on market outlook and valuation opportunities.	Allocates investments across at least three asset classes, like equity, debt, and gold or silver. The fund manager rebalances exposure periodically to maintain diversification and respond to market movements among different asset classes.
Flexibility	Limited, as 25% allocation to each market cap must be maintained at all times. Still, flexibility is higher than that of pure large, mid or small cap funds.	Provides broader flexibility by dynamically shifting allocation across asset classes (as long as 10% allocation is maintained in each). During volatile equity phases, the fund may increase allocation to debt or gold for relative stability, and vice versa during bullish conditions.
Risk management approach	Risk remains very high, because at least 75% of the portfolio must be allocated to equities, with 25% exposure to each market cap. However, the balance 25% of the portfolio may be managed to potentially reduce risk during volatility.	Risk is managed through diversification across asset classes. Exposure to non-equity assets like debt and gold may reduce overall portfolio volatility.
Return potential	High long-term potential, driven by diversified equity exposure across market caps.	Relatively balanced potential returns, as multi-asset exposure may smoothen fluctuations but may limit equity-linked growth.
Investor suitability	May be suitable for investors seeking active management within equity and willing to accept higher market risk.	May be suitable for investors preferring a balanced approach with exposure to multiple asset classes and relatively lower volatility.

Which fund is better?

For investors with a very high risk appetite and longer investment horizons of over 5-10 years, multi cap funds may be more suitable given their equity orientation and growth potential over an extended period.
For investors with high risk tolerance and a medium-to-long investment horizon can consider multi asset allocation funds. However, the level of equity allocation in the portfolio can influence the risk profile and the suitable investment horizon.
Younger investors in their 20s and 30s with higher risk capacity may prefer multi-cap funds to capitalise on long term wealth creation potential.
Investors moving closer to retirement may opt for multi asset allocation funds given their relatively lower volatility and balanced approach.

Who should invest in multi cap funds vs multi asset allocation funds?

Multi cap funds may suit investors focused on long-term equity growth, while multi asset allocation funds may appeal to those seeking balance and diversification across asset classes.

Multi cap funds:

May be suitable for investors with a high risk appetite who are comfortable with full equity exposure.
Suitable for those aiming for long-term wealth creation, typically over five years or more.
May be suitable for investors seeking diversification within equities, as these funds invest across large cap, mid cap, and small cap stocks.
Investors who prefer active management and want to capture potential opportunities across market segments.

Multi asset allocation funds:

May be suitable for investors seeking diversified exposure across equity, debt, and commodities, offering a balanced investment approach.
Suitable for those with a moderate to high risk appetite, preferring relatively stable performance through market cycles.
Suitable for investors with a medium- to long-term horizon, aiming for gradual and consistent portfolio growth.
May be suitable by those who value automatic asset rebalancing, where the fund adjusts exposure based on market conditions.
May be used as a diversification tool within a portfolio to help reduce volatility while retaining some equity-linked growth potential.

Conclusion

The choice between multi-cap and multi asset funds depends chiefly on an investor's risk appetite, targeted return potential and investment horizon. Assess your specific investor profile and financial goals. Consult a financial advisor to determine which category of multi-strategy fund suits you better currently.

FAQs:

What is a multi cap fund, and how does it work?

A multi-cap fund invests across large, mid and small cap stocks with a minimum 25% allocation in each market cap segment. By combining stocks across market caps, it aims to mitigate risk and optimise return potential.

What is a multi asset allocation fund and what makes it different from other mutual funds?

A multi asset fund invests across equity, debt and other assets like gold based on changing market conditions. This dynamic allocation helps optimise the risk/return balance in evolving market conditions. The key difference versus other mutual funds is their diversification across asset classes rather than just equity or debt.

What are the key differences between multi cap funds and multi asset allocation funds?

The key differences are that multi-cap funds invest purely in equities, while multi asset allocation funds have a mix of equities, debt and other assets. Multi-cap funds have higher potential returns but also higher risk. In contrast, multi asset funds may be less impacted by volatility owing to their exposure to other asset classes. However, this may also lower their return potential compared to pure equity funds.

Which type of investor could find multi cap fund more suitable than multi asset allocation fund?

Aggressive investors with a very high risk appetite and an investment horizon of 5+ years may prefer multi-cap funds. Investors with slightly lower risk tolerance may opt for a multi asset allocation fund to diversify across equities, debt and gold.

How do the risk and return profiles of multi cap funds compare to multi asset allocation funds?

Multi-cap funds carry higher risk due to exclusive focus on equities across market caps. They can potentially generate higher returns in the long term but with significant volatility in the short or medium term. Multi asset allocation funds may offer a more relatively stable return potential, with lower downside risk.

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