Multi-Cap vs Focused Equity Funds

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 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.

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

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.

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.

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

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.

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.

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.

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

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.

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.