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Multi-Cap vs Focused Equity Funds

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Anshika

Table of Contents

Multi-cap funds and focused equity funds are classified equity mutual fund categories under SEBI’s mutual fund framework. While both invest primarily in equities, they differ in portfolio construction, diversification levels, and regulatory allocation norms. Understanding these distinctions provides context on how each fund type functions within the broader equity mutual fund landscape.

What are Multi-Cap Funds

What are multi cap funds can be understood by looking at their structure within the Indian mutual fund framework. Multi-cap funds are equity mutual funds regulated by SEBI that invest across large-cap, mid-cap, and small-cap stocks, providing exposure to companies with different market capitalisations within a single portfolio.

Regulatory allocation requirement

Under SEBI’s mutual fund classification norms, multi-cap funds are required to allocate a minimum of 25% each to large-cap, mid-cap, and small-cap equities. This mandatory allocation distinguishes multi-cap funds from other diversified equity categories and defines how capital is distributed across market segments.

Risk–return profile

By investing across multiple market capitalisation segments, multi-cap funds reflect a blended risk profile. Large-cap holdings contribute relative stability, while mid-cap and small-cap allocations introduce higher growth potential along with increased volatility. Portfolio performance is influenced by movements across all three segments rather than a single market-cap category.

Portfolio suitability characteristics

Multi-cap funds are structured to provide broad equity market exposure within one scheme. Their design allows participation across different phases of the market cycle, as returns are derived from a combination of large, mid, and small-cap stock performance rather than concentrated exposure to one segment.  

Features of Multi-Cap Funds

  • Mandatory allocation: Under SEBI’s classification norms, multi-cap funds are required to allocate a minimum of 25% each to large-cap, mid-cap, and small-cap stocks.

  • Portfolio composition: Investments are distributed across companies of different market capitalisations, resulting in exposure to multiple segments within a single portfolio.

  • Investment horizon context: Multi-cap funds are structured to hold equity investments across market cycles, with returns influenced by performance across large-, mid-, and small-cap segments.

What are Focused Equity Funds

To address what is a focused equity fund, a focused equity fund is an equity mutual fund category that invests in a limited number of stocks, capped at a maximum of 30 securities, as prescribed by SEBI. These funds may invest across large-cap, mid-cap, and small-cap stocks, without mandatory allocation requirements across market capitalisations.

Features of Focused Equity Funds

  • Portfolio limited to a maximum of 30 stocks

  • Exposure permitted across all market capitalisation segments

  • Higher portfolio concentration compared to diversified equity funds

  • Performance outcomes closely linked to selected holdings due to limited diversification

Key Differences Between Multi-Cap and Focused Equity Funds

The following table highlights how multi-cap and focused equity funds differ across key parameters:

Feature Multi-Cap Funds Focused Equity Funds

Diversification

Spread across large-cap, mid-cap, and small-cap stocks

Concentrated portfolio with a limited number of stocks

Risk Level

Distributed across market segments

More sensitive to stock-specific movements

SEBI Allocation Norm

Minimum 25% each in large-cap, mid-cap, and small-cap stocks

No mandatory allocation across market capitalisations

Portfolio Construction

Broad-based exposure across sectors and caps

Selective exposure with limited holdings

Concentration Level

Lower concentration

Higher concentration

Advantages of Multi-Cap Funds

The advantages of multi-cap funds arise from their allocation structure, which allows exposure across companies of different market capitalisations within a single portfolio. These characteristics are commonly associated with diversified equity mutual funds under SEBI’s classification framework.

Diversification Across Market Segments

Exposure across large-cap, mid-cap, and small-cap stocks within one fund.
This structure spreads investments across multiple market segments, reducing concentration in any single capitalisation category and contributing to portfolio diversification.

Potential for Risk-Adjusted Returns

Combination of relatively stable and higher-growth equity segments.
By allocating across market capitalisations, multi-cap funds balance exposure between established companies and emerging businesses, which may influence return patterns across market cycles.

Suitable for Goal-Based Investing

Alignment with long-term investment horizons.
The diversified allocation profile of multi-cap funds is often referenced in discussions around benefits of multi-cap mutual funds when mapping equity exposure to long-duration financial objectives, without reliance on a single market segment.

Advantages of Focused Equity Funds

Focused equity funds are structured around concentrated portfolios, resulting in specific portfolio-level characteristics.

High-Conviction Portfolio Structure

Investment concentrated in a limited number of selected stocks.
A focused equity fund maintains a smaller portfolio size, allowing capital to be allocated to specific securities rather than spread across a broad universe.

Performance Driven by Stock Selection

Portfolio outcomes closely linked to individual holdings.
Because a focused equity fund holds fewer securities, changes in the performance of individual stocks have a more pronounced impact on overall fund movement.

Flexibility Across Market Capitalisations

Ability to invest across large-cap, mid-cap, and small-cap stocks.
Focused equity funds are not subject to mandatory allocation limits across capitalisation segments, enabling portfolio construction based on security selection rather than preset allocation thresholds.

Risk Factors to Consider

Each fund category carries distinct risk characteristics arising from portfolio structure and allocation norms.

Multi-Cap Funds

  • Exposure to mid-cap and small-cap segments may result in higher volatility during market downturns

  • Broad diversification may still be affected by sector-wide or market-wide slowdowns
     

Focused Equity Funds

  • Portfolio concentration increases sensitivity to the performance of individual stocks

  • Underperformance in a small number of holdings may have a larger impact on overall fund performance

Performance Outlook and Market Conditions

The performance of multi-cap and focused equity funds varies across market phases due to differences in portfolio construction, particularly the level of diversification and concentration.

  • Bull market phases:
    Focused equity funds, with exposure limited to a smaller set of selected stocks, tend to reflect the performance of those underlying holdings more directly. When broader market momentum favours specific sectors or companies, returns from such concentrated portfolios often move in line with those segments.

  • Volatile or bearish market phases:
    Multi-cap funds distribute investments across large-cap, mid-cap, and small-cap stocks. This broader allocation structure spreads exposure across multiple market segments, which can influence how portfolio performance responds during periods of uneven or declining market conditions.
     

Overall, differences in performance across market cycles are linked to how each fund category allocates capital and manages exposure, rather than to market direction alone.

Structure of Multi-Cap Funds

Multi-cap funds allocate investments across large-cap, mid-cap, and small-cap stocks in line with SEBI-prescribed allocation norms. Portfolio composition reflects exposure to companies of varying sizes, with asset allocation decisions managed within the regulatory framework applicable to the category.

Who Typically Uses Each Fund Type

Participation in multi-cap and focused equity funds varies based on investment approach, portfolio structure preferences, and exposure concentration rather than investor intent or suitability. The table below outlines common associations observed in market categorisation discussions.

Investor Profile Context Commonly Associated Fund Type

Broad diversification across market capitalisations

Multi-cap funds

Concentrated portfolio with limited holdings

Focused equity funds

Entry-level exposure to diversified equity portfolios

Multi-cap funds

Concentrated equity exposure linked to selective stock positions

Focused equity funds

Taxation Rules (Same for Both Fund Types)

Multi-cap funds and focused equity funds follow the same tax treatment because both are classified as equity-oriented mutual funds under Indian tax regulations.

  • Short-Term Capital Gains (STCG): Gains arising from redemption within 12 months are taxed at 15%, irrespective of the investor’s income slab.

  • Long-Term Capital Gains (LTCG): Gains on units held for more than 12 months are taxed at 10% on amounts exceeding ₹1 lakh in a financial year, without indexation.
     

This uniform taxation framework applies across equity mutual fund categories and does not vary based on portfolio concentration or market capitalisation exposure.

Key Aspects of Multi-Cap Funds

Multi-cap funds are characterised by factors related to portfolio management and cost structure, which are disclosed as part of scheme documentation.

  • Fund management approach and tenure

  • Expense ratio and applicable exit load, as disclosed by the scheme

  • Historical performance data relative to benchmarks and peer funds

  • Investment horizon and portfolio turnover characteristics

Conclusion

Multi-cap funds and focused equity funds represent distinct equity mutual fund categories under SEBI’s classification framework, differentiated by allocation requirements, diversification levels, and portfolio concentration. While multi-cap funds follow mandatory exposure across market capitalisations, focused equity funds operate with a limited number of holdings. These structural differences influence how each category behaves across market conditions, highlighting the importance of understanding fund design rather than viewing the categories interchangeably.

Disclaimer

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.

FAQs

Do focused equity funds invest in small-cap stocks?

Yes. Focused funds can invest across market capitalisations including small-cap, mid-cap, and large-cap companies.

Multi-cap funds are required by SEBI to maintain a minimum allocation of 25% each in large-cap, mid-cap, and small-cap stocks. Portfolio rebalancing occurs as needed to remain compliant with these allocation norms and prevailing regulatory requirements.

Focused equity funds invest in a limited number of stocks, which can lead to concentration risk if a few holdings underperform. They are also subject to general market risks, sectoral exposure risks, and volatility across market cycles.

Different fund types vary by their investment focus. For example, equity funds invest primarily in stocks, debt funds in fixed-income securities, hybrid funds combine equity and debt, while index funds replicate benchmark indices. Each follows its own strategy and objectives.

Multi-cap funds allocate investments across large-cap, mid-cap, and small-cap stocks, resulting in broader diversification. Focused equity funds invest in a limited number of stocks, which increases portfolio concentration and sensitivity to the performance of individual holdings.

As per SEBI’s mutual fund classification rules, an Asset Management Company (AMC) can launch only one focused equity fund. This ensures consistency across offerings and prevents duplication of the same scheme category within a single AMC.

Multi-cap funds are required by SEBI to allocate a minimum of 25% each to large-cap, mid-cap, and small-cap stocks. This allocation structure defines their exposure across different market capitalisation segments.

Yes. While both fall under the equity mutual fund category, SEBI prescribes different classification and portfolio construction norms for multi-cap funds and focused equity funds, particularly with respect to allocation requirements and portfolio concentration.

Multi-cap funds are required to maintain a minimum allocation of 25% each in large-cap, mid-cap, and small-cap stocks, whereas focused equity funds follow a concentrated strategy with a maximum limit of 30 stocks and no mandatory allocation across market capitalisations.

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Hi! I’m Anshika
Financial Content Specialist
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Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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