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Multi-cap mutual funds invest in stocks across large-cap, mid-cap, and small-cap segments. Their key advantage lies in diversification across different market capitalisations, which helps balance risk and return. However, for these funds to remain aligned with their investment objectives, fund managers regularly engage in rebalancing — adjusting the portfolio composition based on market dynamics.Multi-cap fund rebalancing is the process of adjusting your portfolio's allocation across large, mid, and small-cap stocks to maintain your desired risk-return profile, typically by selling outperforming assets and buying underperforming ones to buy low and sell high, thereby aligning with your financial goals and market conditions.
This guide explores what multi-cap fund rebalancing is, how it works, why it matters, and what long-term investors should keep in mind.
Multi-cap funds are equity mutual funds that invest in a mix of large-cap, mid-cap, and small-cap stocks. Unlike focused or single-cap funds, multi-cap funds offer exposure to a broader market base, which can cushion against segment-specific volatility.
SEBI’s regulations mandate multi-cap funds to allocate:
At least 25% in large-cap stocks
At least 25% in mid-cap stocks
At least 25% in small-cap stocks
The remaining 25% can be allocated flexibly, depending on the fund manager’s market view.
Rebalancing is the process of adjusting the weightage of various stocks or sectors in the fund’s portfolio to maintain compliance with SEBI mandates and internal investment strategies.
This may involve:
Selling assets that have grown beyond desired levels
Buying into segments that are underrepresented
Shifting allocations based on risk, performance, or valuation changes
Rebalancing typically happens quarterly, half-yearly, or annually, depending on the fund’s strategy.
Imagine a fund started with:
30% large-cap
35% mid-cap
25% small-cap
10% flexible
After a year, due to strong mid-cap performance, the new mix becomes:
28% large-cap
45% mid-cap
22% small-cap
5% flexible
Since this violates the mandated minimum for small-caps and tilts too much toward mid-caps, the fund manager may:
Sell some mid-cap stocks
Buy small-cap stocks
Restore balance for regulatory and strategic alignment
Fund managers rebalance multi-cap portfolios for several strategic and regulatory reasons that support long-term fund stability and performance:
To ensure the fund remains within SEBI’s prescribed limits (25% minimum in each category), fund managers must adjust allocations when market movements skew the proportions.
Rebalancing helps book profits from overperforming stocks or sectors and reinvest into undervalued opportunities.
By preventing overexposure to a single market segment, rebalancing helps stabilise the fund’s risk profile.
Market cycles affect large-, mid-, and small-cap stocks differently. Rebalancing allows managers to shift focus depending on economic trends, interest rate cycles, and investor sentiment.
| Factor | Impact on Investors |
|---|---|
Portfolio Turnover |
May lead to short-term capital gains tax |
NAV Fluctuations |
Prices can shift during rebalancing |
Transparency |
Explained in monthly or quarterly reports |
Fund Strategy |
Reflects how actively the fund is managed |
While rebalancing is meant to improve long-term outcomes, it may cause temporary volatility or tax implications in the short term.
Different funds follow varied rebalancing strategies, which can affect risk exposure and returns over time:
| Fund Name (Example) | Rebalancing Style | Frequency |
|---|---|---|
Multi-Cap Fund A |
Quantitative + Qualitative |
Quarterly |
Multi-Cap Fund B |
Thematic Tilt |
Bi-annually |
Multi-Cap Fund C |
Passive Weight Rebalancing |
Annually |
Investors should read the fund’s Scheme Information Document (SID) to understand the rebalancing framework and any related implications.
For long-term investors, rebalancing activity should be viewed through a strategic lens rather than a cause for concern:
Don’t react to short-term rebalancing moves. These are part of the fund’s mandate and do not signal negative performance.
Check how often the fund rebalances and whether it aligns with your own investment goals and tax preferences.
Look for consistent adherence to the fund’s stated objective — for instance, balancing across all cap sizes without favouring one excessively.
Frequent rebalancing can result in short-term capital gains if the fund manager realises profits. Review your statements to understand taxable events.
Multi-cap fund rebalancing is a crucial tool for ensuring regulatory compliance, managing risk, and aligning with market conditions. For long-term investors, it's a behind-the-scenes mechanism that helps keep the fund stable and growth-oriented. While it may lead to some portfolio churn, disciplined rebalancing ensures the fund remains diversified and aligned with its objective — which ultimately benefits the investor over time.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
It varies by fund. Some rebalance quarterly, while others may do it half-yearly or annually based on market movements and fund mandates.
Yes, but usually in a positive way over the long term. Rebalancing helps maintain diversification and manage risk.
Yes. If the fund sells stocks that generate short-term capital gains, it may impact the NAV, which reflects in your returns.
It depends on your risk profile. Active rebalancing can lead to better returns but may also increase churn and costs.
Fund fact sheets, monthly updates, and portfolio disclosures usually indicate any significant allocation shifts.
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Posted on 19 Dec
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