Many investors with limited experience and modest funds may not have the bandwidth to invest in multiple mutual fund schemes. This is where multi cap funds come into the picture. These funds are gradually gaining traction in India as they offer diversification across the spectrum of market capitalisation within a single scheme.
In this article, we will learn more about multi cap funds including how they work, their potential advantages and associated risks, their historical performance, and whether it is a suitable time to invest in them.
Multi cap mutual funds – The meaning
Multi cap mutual funds are equity-oriented schemes that invest in the stocks of companies across various market capitalisations, including large caps, mid caps and small caps. As per SEBI’s re-categorisation norms, these funds must invest a minimum of 25% of their portfolio in the stocks of each capitalisation.
Thus, the allocation is spread across companies of various sizes. Although the 25% minimum allocation is mandatory in each of large, mid and small cap companies, fund managers can dynamically rebalance the remaining 25% allocation based on their outlook and market trends.
Recent market trends impacting multi cap funds
Even with some short-term challenges, India’s economy remains strong at its core. The RBI expects GDP to grow around 6.5% in FY2026, supported by steady rural demand, a likely rise in urban spending, higher government investment, more private consumption, and a recovery in many industries.
Furthermore, this growth is not just limited to the top 50 or 100 big companies. Sectors like electric vehicles, PLI-based manufacturing, digital infrastructure, tier-2 and tier-3 finance and specialty chemicals are gaining momentum, many of which include mid cap and small cap companies.
Thus, multi cap funds give investors the opportunity to potentially capitalise from this anticipated wide-ranging economic growth, as they combine the potential of emerging companies with the relative stability of established large cap companies.
Multi cap mutual funds – The benefits
Diversification
These funds diversify across various market segments and give exposure to companies with different growth prospects. While large caps may offer relative stability and reasonable capital appreciation, mid caps and small caps carry the potential for outperformance, especially over the long term.
Flexibility
These funds offer fund managers with some flexibility to invest as the residual 25% of the portfolio can be allocated at their discretion based on their outlook and evolving market conditions.
Long-term potential
The mix of relatively stable and potentially growth-oriented companies in multi cap funds may contribute to potential wealth creation, especially over a long horizon.
Read Also: Multi Cap Vs Multi Asset Allocation Fund: Differences and Which is Better?
Multi cap mutual funds – The risks
- Over exposure: A fund manager’s choice of how much and when to invest in large cap, mid cap and small cap stocks plays a big role in overall performance. Putting too much money into underperforming segments can dampen the return potential and skew the risk/return profile of the portfolio.
- Market risk: Since these funds are equity-oriented, they are directly impacted by market fluctuations.
- Liquidity risk: During market downturns, small cap and mid cap stocks may become less liquid, affecting overall fund performance.
Multi cap funds – Suitable for
- First-time equity investors, as it keeps the risk in control while offering the potential for returns in the long run.
- Investors who are confused about whether to invest in big companies for their relative stability or go for mid caps and small caps which can potentially give high growth
- Those with a moderate to high risk appetite, who can withstand market fluctuations in the short- to mid-term.
- Individuals aiming for long-term financial goals, such as retirement planning or potential wealth accumulation to meet specific objectives.
Read Also: Why Multi-Cap Funds Could Be Your Best Investment in 2025
Is this the right time to invest in multi cap mutual funds?
Thanks to India’s GDP growth and a business-friendly environment, the economy is on an upward trajectory. Big investments in areas like infrastructure, manufacturing and technology show the country’s active efforts to support long-term, sustainable growth.
This positive market situation makes multi cap funds a suitable avenue for investors as these funds offer a convenient way to access growth potential across the market capitalisation spectrum––for example, small cap firms that could potentially grow into mid cap or large cap companies in the future. Hence, multi cap funds provide investors the opportunity to potentially benefit from the growth story of India’s overall economy.
Choosing the right multi cap fund – The tips
- Check and research the fund manager’s track record and experience in handling market volatility.
- Check for consistency of returns over different time periods like 1 year, 3 years, 5 years etc.
- It is advisable to check the expense ratio beforehand. Expense ratio can impact overall returns especially in the long run.
- Go through the portfolio composition and how it aligns with your personal risk appetite.
Conclusion
Multi cap mutual funds can provide balanced exposure to large cap, mid cap and small cap stocks, making them potentially suitable for the objective of long term wealth creation with some level of risk mitigation. With markets presenting mixed signals in 2025, investors may consider exploring these funds as part of a diversified investment strategy.
FAQs:
What makes multi cap mutual funds different from other mutual funds?
Multi cap funds invest across large, mid and small cap stocks, offering broad market exposure. Unlike focused or large cap-only funds, multi cap funds must maintain a minimum of 25% in each market cap category, ensuring some diversification.
Are multi cap funds suitable for long-term investment?
Multi cap funds may be suitable for long-term goals as they offer potential wealth creation through diversified equity exposure. The combination of relatively stable large caps and potentially growth-oriented mid/small caps may align with this goal.
How do market conditions affect multi cap mutual fund performance?
Since multi cap funds are equity-oriented funds and exposed to all market capitalisations, their performance is highly sensitive to market cycles as each segment reacts differently to changing market conditions.
Can I start an SIP in a multi cap fund during market volatility?
Yes, SIPs offer a disciplined approach to investing as they encourage periodic contributions that mitigate market timing risk and average out the total cost of your investment, thus smoothing market volatility.
What is a suitable investment horizon for multi cap mutual funds?
As with all equity-oriented instruments, multi cap funds may be more suited for investors with a long-term horizon of 5–7 years or more.
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