Multi-Cap Fund

A multi-cap fund is SEBI's answer to a specific problem: funds that claimed to invest across company sizes but quietly parked most of their money in safe large-caps. The category now comes with hard floors.

The 25-25-25 Rule

Under SEBI's guidelines, a multi-cap fund must hold a minimum 25% in large-caps, 25% in mid-caps and 25% in small-caps, with at least 75% of total assets in equity overall. The remaining quarter gives the manager some freedom to tilt toward whichever segment looks attractive.

This structure was introduced in September 2020. Before that, the minimum equity allocation was just 65% and there were no rules on the split across sizes, so many "multi-cap" funds behaved like large-cap funds in disguise. SEBI's circular forced genuine diversification across the size spectrum and, in doing so, created a new sister category — *flexi-cap* — for managers who wanted to roam freely without the fixed buckets.

What It Means for Investors

The mandatory small- and mid-cap floors give multi-cap funds more punch than a pure large-cap fund. The forced exposure to smaller companies means higher growth potential — and higher volatility. When small- and mid-caps are buoyant, multi-cap funds tend to outperform; when those segments correct sharply, the 50% locked into mid- and small-caps drags the fund down with them.

That rigidity is also the category's main criticism. A manager who turns cautious on small-caps cannot simply move out — the 25% floor must be respected regardless of valuations or liquidity. During periods when small-caps looked stretched, this rule meant multi-cap managers had to keep buying into a segment many of them privately considered overpriced.

For an investor, the choice between multi-cap and flexi-cap comes down to this discipline. Multi-cap guarantees you real exposure to all three sizes at all times — useful if you want that diversification enforced rather than left to a manager's discretion. Flexi-cap trusts the manager to read the cycle.

Either way, multi-cap funds suit investors with a long horizon who want one diversified equity holding and can stomach the swings that mandatory small-cap exposure brings.