Investing in multi-cap funds offer a dynamic structure that can capture opportunities across large, mid, and small-cap stocks. This balanced approach enables an investor to participate in different market cycles more effectively.
Multi-cap funds by mandate are required to invest a minimum 25% each in large, mid, and small-cap stocks. This ensures balance between stability and growth, making them an attractive core allocation, especially in a market with narrow leadership and cyclical sector churns.
Returns higher than that of diversified funds
Multi-cap funds have shown higher long-term performance in recent years as compared with diversified funds. Over a five-year period, multi-cap funds have generated an average return of 25.15%, much higher than the 21.3% average return delivered by flexi-cap funds.
While both categories benefit from diversified exposure, the mandated minimum 25% allocation to each of large, mid, and small caps in multi-cap funds has helped them capture broader market participation—especially the strong performance of mid and small caps in recent years.
Nirav Karkera, head, Research, Fisdom, says this has translated into better alpha generation for long-term investors in the multi-cap space. “Even on a median basis, multi-caps have edged ahead, suggesting consistency across most funds in the category,” he says.
Generating alpha
Alpha in multi-cap funds comes from tactical allocations within the 25-25-25 framework. Investors should look for funds with disciplined bottom-up stock selection and dynamic tilts within each bucket. A well-constructed fund typically allocates 25–40% to large-caps for downside protection and liquidity, while mid and small-caps make up 60–75% to tap into high-growth opportunities.
Sonam Srivastava, founder, Wright Research PMS, says large-caps with strong earnings visibility, mid-caps with operating leverage, and small-caps with margin resilience and promoter skin-in-the-game are alpha contributors. “A good multi-cap fund will actively manage intra-segment allocations based on earnings upgrades, factor strength (momentum, quality), and valuation spreads,” she says.
Short-term volatility
Though these funds offer diversification benefits, they can still see significant fluctuations due to their mid and small-cap exposure. “It is important to assess one’s risk appetite and investment horizon, as returns can be volatile in the short term but rewarding over the long term,” says Swapnil Aggarwal, director, VSRK Capital.
It is also important to evaluate the track record and investment approach of the fund manager, particularly their ability to identify high-conviction ideas across cap segments and manage risk actively. Investors should ensure the fund’s multi-cap strategy complements the rest of their portfolio, rather than overlapping with existing holdings.
Stay invested across cycles
Multi-cap investing works best when investors stay invested across cycles. Typically, a five-year horizon allows the strategy to ride out market whipsaws and compound gains through allocation shifts. Holding the fund across a full cycle ensures that investors benefit from the strategy’s broad-based potential. Also, holding through periods of under-performance is key, as mean-reversion and sector rotations often reward patient capital.
Puneet Sharna, CEO, Whitespace Alpha, a Category 3 AIF, says trying to time entry and exit in multi-cap funds often defeats their core advantage which is adaptability across phases. “If the structure is right and risk is managed well, time becomes the best multiplier.”
Investors must look at how the fund handles volatility and the process behind its allocation shifts. They must understand the fund’s ability to generate alpha consistently and not just during bull runs. They must also check if the strategy adapts well to both macro cycles and micro changes especially in mid and small cap segments.
A smart multi-cap portfolio does not just tick boxes across market caps — it understands when to overweight safety, when to lean into momentum, and when to sit tight.