Is it the right time to invest in multi-cap funds? Five reasons to consider

As India’s stock markets mature and broaden across large, mid, and small-cap segments, multi-cap funds are emerging as an increasingly relevant investment choice, especially amidst growing volatility. These funds, under the Securities and Exchange Board of India (SEBI) mandate, must allocate a minimum of 25 percent of their corpus to each of large-, mid-, and small-cap stocks, giving investors balanced exposure across the full spectrum of listed companies.

Investor interest has also picked up sharply in recent years. There are now 31 multi-cap funds in the industry, and their combined assets under management (AUM) have grown nearly tenfold—from around Rs 18,000 crore in 2021 to Rs 1.9 lakh crore by May 2025, according to Association of Mutual Funds in India (AMFI) data. Inflows in May alone stood at Rs 2,999 crore, reflecting growing investor confidence in the category.

According to Trust Mutual Fund’s Mihir Vora, these funds are well-positioned to capture India’s evolving market dynamics. He was speaking as part of the NFO launch for Trust MF.

Here are five reasons why, according to Vora, multi-cap funds may be the right bet for investors today.

A broader and deeper market

India’s investible universe has expanded dramatically over the past five years. In 2019, only 503 companies had a market capitalisation above Rs 2,000 crore. By the end of 2024, that number had more than doubled to 1,148. During this period, the total market cap of mid and small-cap companies grew nearly four times, outpacing the 2.2x expansion in large-caps.

This shift has changed the market’s composition. Large-caps, which accounted for 77 percent of the total market cap in 2019, now make up just 62 percent. The market is no longer top-heavy. With a much wider base of fast-growing companies outside the top 100 stocks, multi-cap funds are structurally better placed to tap into this broader opportunity set.

Access to emerging sectoral trends

Many of India’s high-growth sectors are under-represented in the large-cap space. Capital markets, manufacturing, discretionary consumption, and defence are largely driven by mid and small-cap companies. For example, industrials make up 18.3 percent of the small-cap index but just 5.8 percent in the large-cap index. The capital markets segment (comprising exchanges, brokers, and asset managers) is mostly absent from the large-cap universe.

Similarly, healthcare sub-segments like hospitals, diagnostics, and CDMO companies have seen strong listings in the last few years, with most falling in the mid and small-cap buckets. For investors looking to benefit from India’s next phase of structural growth, multi-cap funds offer diversified access across these emerging themes.

Consistent outperformance over broader indices

The performance data supports the case for multi-cap strategies. The Nifty 500 Multicap 50:25:25 TRI index, which reflects a balanced allocation across market caps, has outperformed the broader Nifty 500 TRI in most of the last five calendar years. In 2023, it delivered a return of 33.7 percent compared to 26.9 percent for the Nifty 500. In 2021, the gap was even wider at 40.6 percent versus 31.6 percent.

From June 2005 to May 2025, the Multicap index delivered 21x returns, compared to 16x for the Nifty 500 TRI. On a risk-adjusted basis, the return per unit of risk over five years was 1.9 for the multi-cap index, compared to 1.7 for the broader benchmark.

On average, on a 3-year basis, multi-cap funds have given returns of around 24 percent.

Market leadership rotates across cap segments

Historical market data shows that leadership between large, mid, and small caps is cyclical and difficult to predict. Small-caps outperformed in 9 of the last 19 calendar years, large-caps led in 7, and mid-caps in just 3. In 2023, small caps delivered 48.6 percent returns, mid-caps 44.2 percent, and large-caps 21 percent. But in 2022, large-caps outperformed both.

This inconsistency makes market timing extremely challenging. Multi-cap funds, with their mandated allocation across segments, help investors stay invested in whichever part of the market is leading — without having to make tactical shifts themselves.

Is a multi-cap strategy better than other diversified approaches?

While multi-caps follow a defined approach — typically allocating a minimum 25 percent each to large-cap, mid-cap and small-cap stocks — the diversified approach offers flexibility, allowing fund managers to dynamically adjust allocations based on market conditions and opportunities. This may lead to higher exposure in a particular market cap, depending on the perceived opportunities.

Sandeep Bagla, CEO, Trust Mutual Fund, explains that a multi-cap approach is ideal for investors seeking consistent, balanced exposure without managing multiple schemes, with a preference for clarity and discipline over tactical shifts. “Both approaches suit different investor preferences. Multi-cap provides stability through defined diversification, while the diversified approach allows adaptability to changing market dynamics. The right choice ultimately depends on an investor’s goals and risk appetite,” he says.

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