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

As Indian equities continue to hover near record highs and retail participation in mutual funds increases, investors are frequently asking: is now a good time to invest in multi-cap mutual funds? These diversified equity schemes, which allocate capital across large-cap, mid-cap, and small-cap stocks, are gaining traction for their balanced exposure and potential for consistent returns. Market analysts suggest that the current market cycle may be well-suited for multi-cap strategies. Here are five compelling reasons to consider investing in multi-cap funds now.

1. Balanced Exposure Across Market Capitalizations

Multi-cap funds are mandated to invest at least 25% each in large-cap, mid-cap, and small-cap stocks. This diversified allocation helps mitigate risks associated with a particular segment while capturing opportunities across the market spectrum.

"Multi-cap funds strike a fine balance between stability and growth. Large-caps bring defensiveness, while mid- and small-caps offer high-growth potential," says Ajay Tyagi, Head of Equities at UTI AMC.

Amid volatile global cues and domestic macroeconomic resilience, this diversified allocation is particularly valuable.

2. Favourable Market Environment for Broader Participation

India's equity market breadth has improved over the past year, with broader indices outperforming benchmarks. The Nifty Midcap 150 and Nifty Smallcap 250 have delivered double-digit gains over the last 12 months, indicating growing investor confidence beyond large-caps.

"The structural bull market in India is no longer restricted to a few heavyweight stocks. Sector rotation and policy-driven tailwinds have enhanced the appeal of mid- and small-caps," notes Swati Kulkarni, Portfolio Manager at DSP Mutual Fund.

Multi-cap funds are uniquely positioned to benefit from this broad-based rally.

3. Strong SIP Inflows and Retail Interest

According to AMFI data, Systematic Investment Plan (SIP) inflows touched an all-time high of ₹20,904 crore in June 2025. A significant portion of these flows is directed into diversified equity funds, including multi-cap schemes.

Retail investors, especially those with a moderate risk appetite, prefer multi-cap funds for their ability to ride various market cycles without the need for frequent portfolio rebalancing.

4. Flexibility to Navigate Volatility

Unlike pure mid-cap or small-cap funds, multi-cap schemes are better equipped to weather downturns, thanks to their exposure to stable large-cap companies. In times of heightened volatility or geopolitical uncertainty, this flexibility provides a cushion against deep drawdowns.

"Multi-cap funds offer the advantage of active allocation within a mandated structure. Fund managers can rebalance dynamically based on valuations, sector outlooks, and macro trends," explains Ravi Gopalakrishnan, CIO at Principal Mutual Fund.

This dynamic rebalancing ability is increasingly important in today’s fast-changing economic environment.

5. Regulatory and Structural Clarity Enhancing Transparency

Since SEBI redefined the multi-cap fund category in September 2020, the mandate to invest minimum 25% across each cap segment has brought clarity and comparability among funds. Investors can now make informed choices based on consistent guidelines, without fear of style drift.

Furthermore, many fund houses have launched or repositioned schemes to comply with these norms, enhancing investor trust.

Market Context: Stable Macros and Growth Momentum

India's economy continues to be among the fastest-growing major economies. With inflation within the RBI’s tolerance band, robust GST collections, and strong FPI inflows, equity markets are enjoying a conducive macroeconomic backdrop.

The Sensex and Nifty 50 remain near record highs, but experts caution against over-concentration in large-caps alone. This makes multi-cap funds an ideal vehicle for participating in the next leg of the market rally.

Investor Outlook: Who Should Consider Multi-Cap Funds?

Multi-cap funds are ideal for investors who:

• Seek long-term capital appreciation with moderate risk

• Want diversified exposure without managing multiple schemes

• Prefer a hands-off investment approach with professional fund management

For new investors, multi-cap funds also serve as a suitable entry point into equity investing due to their diversified nature and relatively lower volatility compared to mid- or small-cap pure-play funds.

"For investors with a 5-7 year horizon, multi-cap funds offer an optimal mix of safety and alpha generation potential," says Harsh Jain, co-founder at Groww.

With improved market participation across sectors and capitalizations, multi-cap funds are emerging as a compelling choice for investors in 2025. Their balanced allocation, flexibility to respond to market changes, and regulatory clarity make them a strong contender in an investor’s equity portfolio.

However, as always, investors should align their fund selection with personal financial goals, risk tolerance, and investment horizon. Consulting a SEBI-registered advisor can further enhance decision-making.