Published On : Mon, Jun 8th, 2020

Is it better to invest in multi-cap funds or separately in large, mid and small cap funds?


A multi-cap fund invests in stocks of large-cap, mid-cap, and small-cap companies in a specific proportion. Hence, it is market capitalization-agnostic. The fund manager has the flexibility of leveraging investment opportunities across market capitalizations to improve the fund’s returns. Every multi-cap fund invests in equity and equity-related instruments of companies across market capitalizations in different proportions. Hence, the performance of each multi-cap fund depends on the composition of the portfolio and the ability of the fund manager to generate returns.

Having understood the basics of multi-cap funds, many investors wonder if it is better to invest in multicap funds or opt for large cap funds, mid, and small-cap stocks individually. The core thought: better control over the investments and alignment with personal financial goals. Today, we will be tackling this question and assess which of the two seems better.

Investing in the equity market based on market capitalisation.


When you invest in the equity market, you can choose to select individual stocks, or invest as per market capitalization or sectors, etc. Market capitalization is the value of the company being traded on a stock exchange. It is calculated by multiplying the current share price with the total number of outstanding shares. Shares are divided into three categories based on their market capitalizations: Large-cap, Mid-cap, and Small-cap.

Large-cap stocks are considered to have the lowest investment risk among the three and offer comparatively low returns. Mid-cap stocks or mid cap funds  carry more risk and offer moderate returns and small-cap stocks have the highest risk and offer the highest returns. While this is expected from these stocks, there is no assurance of the performance (hence the risk!).

Multicap funds

As explained above, in a multicap fund, the fund manager invests in shares of companies across market capitalizations. The scheme has a risk-level that is maintained by creating a balance between stocks from different market caps. The fund manager constantly monitors the performance of the portfolio and makes changes to ensure benchmark returns.

Multicap funds are usually recommended to investors having an investment objective of wealth generation over the long-term with moderate risk exposure. Investors looking for a diversified equity investment option also find these funds a perfect fit.

 Investing in multi-cap funds vs separately in large, mid and small cap funds.

  • Can you invest directly in large-cap, mid-cap, and smallcap funds instead of investing in a multi-cap fund? – Yes
  • Will you get better returns by investing yourself instead of the multi-cap fund? You might.

Which option do we recommend?

It all depends on how comfortable you are with equity investments.

Be your own fund manager

Most successful multi-cap schemes attribute the success to the efficiency of the fund manager. Being an experienced investment professional, a fund manager of a multi-cap fund keeps a close eye on market developments and makes changes to the portfolio based on his assessment of stocks or sectors that might outperform the others. For instance, if you check Tata Multicap fund , although the fund started in 2018, and it’s too soon to judge it’s performance, the fund managers managing it come with a wealth of experience and have managed other funds in equity category successfully over the years.If you decide to create a multi-cap portfolio of your own, then you will have to perform the functions of the fund manager based on your requirements. Also, if you invest in large, mid, and smallcap funds, then the performance of each fund will have to be monitored and decisions will have to be taken accordingly.


If you can manage a multi-cap portfolio efficiently, then you can have the advantage of investing in a manner that diversifies your overall portfolio. While a multi-cap fund focuses on creating a diversified fund portfolio, some investments can clash with the existing investments in your investment portfolio. However, if you take the control in your hands, you can ensure better diversification.

Rebalancing during the ups and downs of the market

When the markets are surging, all stocks perform well but small-caps offer the best returns followed by mid-caps, and finally large-caps. However, when the markets correct themselves most small-caps crash and mid-caps struggle. However, large-caps prove their resilience and weather the storm. Hence, you need to constantly look at the direction in which the market is moving and keep rebalancing your portfolio if you choose to invest yourself. In a multi-cap fund, the fund manager performs this task.

Risk management

While focusing on returns you cannot ignore the overall risk of your investment portfolio. So, if a mid-cap stock is performing below par and you want to replace it with another stock, then you must ensure that the risk exposure of your portfolio remains constant. So, if the small-cap segment is outperforming the others and you decide to increase your stake in small-cap stocks, then you will also increase the portfolio risk. Not investing in them can feel like a missed opportunity. Hence, you need to walk the thin line between returns and risks to ensure that you generate good returns. This is also managed by the fund manager in a multicap fund.

So, what should you do?

Since the performance of a multi-cap fund relies heavily on the fund manager, a multi-cap fund is a good option if you are convinced about the efficiency of the scheme’s fund manager. If you choose the second option and start investing in stocks of companies across market capitalizations yourself, then you will have to invest a lot of time and possess a good understanding of the stock market. While you can try to emulate the portfolio of a multi-cap fund, in the equity market, the timing of the transaction can sometimes be crucial. Hence, if you are not up for the commitment of time and effort, then a multi-cap fund is the best choice.

If you look at investing separately in large-cap funds, mid-cap funds, and small-cap funds, then you will have to ensure that the overall portfolio risk is within your tolerance levels and returns are in sync with your financial goals.

Usually, investors look towards multi-cap funds for a diversified investment in the equity market. If that is your goal, then a multi-cap fund is the simple way to go. You can look at multi-cap funds like the Kotak Standard Multi-Cap Fund (Growth), etc.


A simple answer to the question would be to opt for a multi-cap fund since you will be able to benefit from the experience and expertise of the fund manager. When you are looking for the best multicap fund to invest in, make sure to do a peer comparison as well as check the performance of the fund against the benchmark .While you can look at different ways to achieve diversification yourself, it will require a lot of time, effort, and understanding of the market. Choose wisely. Good Luck!