Multi Cap Fund
A Multi Cap Fund is an open-ended equity mutual fund that must invest a minimum of 25% each in large-cap, mid-cap, and small-cap stocks, ensuring diversified exposure across all market capitalisation segments with no segment being overwhelmingly dominant.
The Multi Cap Fund category underwent a dramatic regulatory transformation in September 2020. Prior to this, schemes labelled as 'multi-cap' funds had no mandated allocation across market-cap segments and were effectively free to concentrate anywhere on the cap spectrum. Many large AMCs ran their flagship schemes as ostensibly multi-cap funds but maintained 70–80% or more in large-caps, making them functionally similar to large-cap funds.
SEBI's circular dated 11 September 2020 redefined the category by mandating a minimum 25% each in large-cap stocks (top 100 by market cap as per AMFI's periodic rankings), mid-cap stocks (101st–250th), and small-cap stocks (251st and beyond), with the remaining 25% free to be invested in any combination. This forced fund managers to meaningfully invest in mid- and small-cap companies, which carry higher risk but also higher long-term return potential.
The practical impact of the September 2020 circular was significant. Several large fund houses with multi-cap flagship schemes — including SBI and Kotak — chose to convert their existing multi-cap schemes into Flexi Cap schemes (a newly created category that has no mandatory allocation bands) rather than comply with the 25-25-25 rule, reasoning that the mandatory small-cap exposure was not suitable for their investor base. A smaller number of AMCs, including Nippon India and Quant, continued under the multi-cap label and rebalanced their portfolios accordingly.
For investors, the mandated 25% small-cap exposure means Multi Cap Funds carry a higher risk profile than Flexi Cap or large-cap funds. Small-cap stocks in India are typically more volatile, less liquid, and more susceptible to earnings shocks. During market downturns — such as the early-COVID crash of March 2020 or the broader small-cap correction of 2018 — small-cap stocks fell significantly more than large-caps. The mandatory 25% floor means the fund cannot reduce this exposure even in adverse conditions.
Conversely, during broad-based bull markets, the mandatory mid- and small-cap exposure can generate superior returns. AMFI data shows that in calendar year 2021, small-cap indices significantly outperformed large-cap indices, benefiting multi-cap funds relative to their pure large-cap peers.
Investors considering Multi Cap Funds must accept the inherent small-cap volatility as a structural feature, not an active bet by the fund manager. The recommended investment horizon for this category is at least 5–7 years.