What are multi-cap funds? A beginner’s guide

What are multi-cap funds? A beginner's guide

Multi-cap funds are equity mutual funds that invest across large-cap, mid-cap, and small-cap stocks, offering diversified exposure to companies of all sizes

What are multi-cap funds? A beginner’s guide Aditya Roy/AI-Generated Image

One fund. Three market segments. A simple approach to diversification. But is it right for you?

If you want to build wealth through equity investing and are looking for a fund that gives you balanced exposure to large, mid and small companies, multi-cap funds are designed for exactly that. They help you tap into the stability of large caps and the growth potential of mid and small caps—all in a single, diversified fund.

But how do multi-cap funds work? And how different are they from flexi-cap funds? In this guide, we’ll break it all down so you can decide if a multi-cap fund fits your investment plan.

At Value Research, we’ve tracked mutual funds for decades, helping people like you make smarter, more confident choices.

What are multi-cap funds?

A multi-cap fund is an equity mutual fund that invests across large-, mid- and small-cap companies.

SEBI rules require multi-cap funds to allocate at least:

25 per cent to large-cap stocks (top 100 companies by market capitalisation)
25 per cent to mid-cap stocks (companies ranked 101–250)
25 per cent to small-cap stocks (251st and below)
The remaining 25 per cent can be allocated at the fund manager’s discretion.

How do multi-cap funds work?

Your money, along with that of other investors, is pooled and invested across the required large-, mid- and small-cap allocations. The fund manager builds a portfolio that meets the regulatory mandate while aiming to choose the best opportunities within each segment.

Since mid- and small-cap stocks can be more volatile, the large-cap portion helps balance out some of this risk.

Multi-cap vs flexi-cap funds

Feature	Multi-cap fund	Flexi-cap fund
Allocation rule	Minimum 25% each in large, mid and small caps	At least 65% investments in equity and equity-related instruments
Flexibility	Lower. Must stick to the mandate	Higher. Can shift as per the market outlook
Best for	Those wanting defined diversification	Those trusting managers’ market calls

Multi-cap funds offer steady diversification; flexi-cap funds offer more freedom to change the mix based on market trends. Further, the manager of a multi-cap fund cannot reduce small-cap exposure during tough times or shift entirely to large caps when markets are choppy. The fund stays diversified by rule.

Performance

Multi-cap funds tend to outperform when markets rise, but fall harder in corrections due to their mid- and small-cap exposure.

For instance, during the April 2021 - October 2021 rally, multi-cap funds gained 28.5 per cent. However, in the November 2024 - February 2025 downturn, they also fell the most, declining 15.5 per cent.

Performance of flexi- and multi-cap funds

Rising phase	Flexi-cap funds	Multi-cap funds
April 30, 2021 to October 31, 2021	24.1%	28.5%
February 28, 2023 to July 31, 2023	18.0%	20.6%
January 31, 2024 to April 30, 2024	5.7%	5.4%
May 31, 2024 to September 30, 2024	16.6%	17.5%
Falling phase
March 31, 2022 to June 30, 2022	-11.0%	-11.2%
November 30, 2024 to February 28, 2025	-13.8%	-15.5%
Category average of direct plans. Rising phases were defined as at least three consecutive months of positive Sensex returns, while falling phases were determined by at least three consecutive months of negative returns.

Why consider multi-cap funds?

Balanced exposure to the full equity market: With a single fund, you get the stability of large caps, the growth potential of mid caps, and the high-reward (but high-risk) opportunity of small caps.
In-built diversification: Your portfolio is spread across company sizes, reducing dependence on any one segment.
Rule-based allocation: The fund sticks to its 25-25-25 mandate, keeping you diversified in all market conditions without relying entirely on the fund manager’s calls.

As per AMFI’s April 2025 data, multi-cap funds have seen strong investor interest, with assets under management (AUM) rising 4.2 per cent in April 2025 and surging 35.8 per cent over the past year. Impressively, their AUM has more than tripled (up 229 per cent) in three years, outpacing many other categories.

Further, several multi-cap funds have delivered 18-21 per cent SIP returns over the last 10 years.

Top 5 multi-cap funds

Fund name	10Y SIP returns	AUM	Expense ratio
Quant Multi Cap Fund	21.09%	Rs 9,927 crore	0.58%
Nippon India Multi Cap Fund	20.39%	Rs 43,483 crore	0.72%
ICICI Pru Multicap Fund	18.38%	Rs 15,095 crore	0.92%
Invesco India Multicap Fund	18.38%	Rs 4,003 crore	0.70%
Baroda BNP Paribas Multi Cap Fund	18.29%	Rs 2,840 crore	0.94%

Where do multi-cap funds fit in your portfolio?

Ideal for you if:

You want a fund that provides broad equity market exposure
You’re looking for a long-term wealth-building tool

Holding period: Like any equity fund, multi-cap funds work best if you stay invested for five years or more, giving mid and small caps time to deliver their growth potential.

SIP suitability: SIPs work well in multi-cap funds because they help you average costs across different market conditions and segments.

Multi-cap funds’ taxation

Multi-cap funds are taxed like any other equity fund:

Short-term capital gains tax: If a fund is held for less than a year, the tax on the gains is 20 per cent.
Long-term capital gains tax: If a fund is held for over a year, the tax rate is 12.5 per cent for gains beyond Rs 1.25 lakh per annum. This means any gains up to Rs 1.25 lakh for the financial year are tax-free.

Things to keep in mind

Higher volatility: The mandatory mid- and small-cap exposure means multi-cap funds can be more volatile than pure large-cap funds, especially in weak markets.
Underperformance in certain phases: When large caps outperform (like in bear markets or early bull runs), multi-cap funds may lag flexi-cap funds, as the latter can tilt heavily towards large caps.
Requires patience: Mid- and small-cap portions take time to show results and can experience sharper ups and downs along the way.