Multi-cap mutual fund
A multi-cap mutual fund in India is an open-ended equity scheme that must, under SEBI’s September 2020 amendment to the scheme categorisation framework, invest a minimum of 75% of its total assets in equity and equity-related instruments, with mandatory minimum allocations of 25% each to large-cap, mid-cap, and small-cap company stocks. This equal-minimum rule ensures that multi-cap funds genuinely diversify across all three market-capitalisation segments, unlike flexi-cap funds which have no such minimum constraint.
The September 2020 amendment fundamentally reshaped the multi-cap category: before that circular, multi-cap funds had no mandatory minimum per market-cap segment and in practice operated as large-cap-heavy diversified funds. The amended category is now more genuinely diversified and carries a higher risk profile than large-cap funds or pre-2020 multi-cap funds.
Regulatory definition
Original 2017 definition
SEBI’s October 2017 categorisation circular defined multi-cap funds as open-ended equity schemes investing across large-cap, mid-cap, and small-cap stocks with a minimum 65% in equity. At this point, there was no minimum allocation by market-cap segment: fund managers freely allocated based on their assessment of relative value.
September 2020 amendment
SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/182 dated 11 September 2020 amended the multi-cap category to require:
- Minimum 25% in large-cap stocks (top 100 companies by AMFI ranking).
- Minimum 25% in mid-cap stocks (101st to 250th companies by AMFI ranking).
- Minimum 25% in small-cap stocks (251st onwards by AMFI ranking).
- Total minimum equity allocation: 75% of total assets.
The remaining 25% may be held in additional equity (of any market-cap), debt instruments, or money-market securities.
This amendment was contentious. The mandatory 25% small-cap floor was the most significant change, as most existing multi-cap funds held only 5% to 15% in small-cap stocks. Acquiring 20% to 25% of AUM (amounting to thousands of crores) in small-cap stocks in a compressed window was seen as potentially market-distorting. SEBI’s response to industry concern was to create the flexi-cap fund category in November 2020, allowing existing multi-cap funds that wished to maintain large-cap-heavy portfolios to reclassify as flexi-cap.
Asset allocation rules
| Market-cap segment | Minimum allocation |
|---|---|
| Large-cap (top 100 by AMFI) | 25% of total assets |
| Mid-cap (101st to 250th by AMFI) | 25% of total assets |
| Small-cap (251st onwards by AMFI) | 25% of total assets |
| Total equity (all segments combined) | 75% of total assets |
| Debt, money-market, cash | Up to 25% of total assets |
The mandatory 75% total equity minimum is higher than the 65% minimum for large-cap, mid-cap, and small-cap funds.
Benchmark
NSE Indices Limited created the NIFTY 500 Multicap 50:25:25 Index specifically to benchmark multi-cap funds after the September 2020 circular. This index allocates 50% of its weight to the NIFTY Large Cap 100, 25% to the NIFTY Midcap 150, and 25% to the NIFTY Smallcap 250. The 50:25:25 weight structure reflects the fact that large-cap companies constitute approximately 50% of the total market capitalisation of the top 500 companies, while mid-cap and small-cap each contribute approximately 25%.
Some AMCs use the S&P BSE 500 or the older S&P BSE 250 LargeMidCap index as alternative benchmarks, though the NIFTY 500 Multicap 50:25:25 has become the standard.
Risk profile
Multi-cap funds carry very high risk due to the mandatory 25% minimum in small-cap stocks:
- Volatility: Higher than large-cap funds (14% to 18% annualised standard deviation) due to the structural small-cap component.
- Drawdowns: Multi-cap funds with 25% small-cap exposure typically experience deeper drawdowns than large-cap or even pure mid-cap funds during market corrections.
- Rebalancing risk: When market movements cause any segment to fall below 25%, the fund must buy more of that segment (typically small-cap during corrections) or sell out-performing segments, creating mechanical rebalancing pressure.
Rebalancing mechanics
The mandatory minimum allocation rule creates a structural rebalancing dynamic:
- If small-cap stocks decline sharply, their share of the portfolio may fall below 25%, requiring the fund to purchase more small-cap stocks precisely when they are falling. This is counter-cyclical but may be painful in extended bear markets.
- Similarly, if large-cap stocks outperform substantially, they may grow above their natural weight, and the fund may need to trim large-cap and add mid-cap or small-cap to restore the relative balance.
This rebalancing effect means multi-cap funds inherently buy smaller-cap stocks on declines, which can enhance long-term returns if valuations revert, but exacerbates short-term drawdowns.
Taxation
Multi-cap funds are equity-oriented funds (minimum 75% in domestic listed equity) and attract equity taxation.
Capital gains (Finance Act 2024):
| Holding period | Tax rate |
|---|---|
| Less than 12 months (STCG) | 20% flat |
| 12 months or more (LTCG) | 12.5% on gains above ₹1.25 lakh per year |
Securities Transaction Tax applies on redemptions. The grandfathering rule for LTCG applies to pre-31 January 2018 units. See capital gains tax in India and ITR-2 for reporting requirements.
Exemplar schemes
Post-2020 multi-cap funds include:
- Nippon India Multi Cap Fund (Nippon India Mutual Fund) – one of India’s oldest diversified equity funds, reclassified/remained as multi-cap
- HDFC Multi Cap Fund (HDFC Mutual Fund) – launched post-September 2020 to comply with new rules
- Kotak Multicap Fund (Kotak Mahindra Mutual Fund)
- Axis Multicap Fund (Axis Mutual Fund)
- ICICI Prudential Multicap Fund (ICICI Prudential Mutual Fund)
- Quant Active Fund (Quant Mutual Fund)
- Mahindra Manulife Multi Cap Fund (Mahindra Manulife Mutual Fund)
- ITI Multi Cap Fund (ITI Mutual Fund)
These examples are cited for reference only.
Comparison with adjacent categories
Multi-cap versus flexi-cap fund
A flexi-cap fund has no minimum allocation per market-cap segment; the manager may invest almost entirely in large-cap stocks. A multi-cap fund enforces structural diversification with 25% minimums. Multi-cap carries higher mandatory small-cap exposure and thus higher risk than a typical flexi-cap fund.
Multi-cap versus large-and-midcap fund
A large-and-midcap fund requires 35% each in large-cap and mid-cap but has no mandatory small-cap minimum. A multi-cap fund’s mandatory 25% small-cap allocation makes it riskier and more volatile than a large-and-midcap fund.
Multi-cap versus small-cap fund
A pure small-cap fund has at least 65% in small-cap stocks, making it far more concentrated in the small-cap segment than a multi-cap fund’s minimum 25% small-cap allocation.
Multi-cap versus focused equity fund
A focused equity fund may hold a maximum of 30 stocks across any market-cap segment. A multi-cap fund is diversified across segments but may hold 40 to 80 stocks.
Suitability
Multi-cap funds are suitable for:
- Investors who want structured exposure to all three market-cap segments in mandated proportions.
- Investors with a high to very high risk appetite and a 7-year or longer investment horizon.
- Investors who believe in the long-term case for small-cap and mid-cap returns but want large-cap stability built in.
- Investors who trust SEBI’s rebalancing mandate to enforce disciplined, counter-cyclical allocation.
Multi-cap funds are less suitable for:
- Investors who want to control their market-cap allocation actively.
- Conservative investors.
- Investors with short investment horizons.
Regulatory oversight
Multi-cap mutual funds are regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996. The mutual fund industry in India framework governs operations. Investor grievances may be filed on SEBI SCORES.
References
- SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2020/182, “Circular on Multi Cap Fund”, 11 September 2020.
- SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, “Categorisation and Rationalisation of Mutual Fund Schemes”, 6 October 2017.
- SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2020/228, “Introduction of Flexi Cap Fund”, 6 November 2020.
- NSE Indices Limited, NIFTY 500 Multicap 50:25:25 Index Methodology.
- Finance Act 2024, Section 112A.