Every investor dreams of growing their corpus through equity mutual funds. They’ve become one of the most trusted ways to participate in the market. They offer both convenience and potential for long-term growth. But here’s the thing: while everyone talks about “diversification,” few understand how it truly works behind the scenes.

If you’ve been exploring the best mutual funds in Pune, you’ve likely come across “multi-cap funds.” They bring some stability, some growth, and some exciting opportunities. Let's check.

What exactly are multi-cap funds?

Think of a multi-cap fund as a balanced meal - you get a mix of all the key ingredients. These funds invest across large-cap, mid-cap, and small-cap stocks, giving exposure to every segment of the market.

As per the regulator’s rule, a multi-cap fund must:

• Invest at least 75% of its total assets in equities.

• Allocate a minimum of 25% each to large-cap, mid-cap, and small-cap companies.

This makes sure the fund remains diversified and not tilted toward just one market segment. It also aligns with the Nifty 500 Multicap 50:25:25 Index, which acts as a benchmark for such funds.

Sounds fair, right? On paper, yes. But in reality, this 25% allocation rule has created a few challenges for fund managers - especially during volatile market phases.

That’s why many investors today turn to professional experts. Firms offering the best mutual fund services in Pune, like Golden Mean Finserv, help investors understand how these rules affect their portfolios - and what that means for their financial goals.

Why was the 25% rule introduced?

Before this rule came into play, many so-called “multi-cap” funds were heavily tilted toward large-cap stocks, sometimes over 80%! That meant they were behaving more like large-cap funds while being marketed as diversified multi-cap funds.

The regulator wanted to fix this mismatch and make sure these funds stayed true to their label. The goal was transparency and fairness - so investors knew exactly where their money was going.

However, in trying to ensure diversification, the rule has also introduced rigidity. Fund managers no longer have the freedom to change allocations dynamically based on market conditions.

How does the fixed 25% allocation impact performance?

Here’s where things get tricky. Markets are cyclical - sometimes large-caps perform better, sometimes mid-caps or small-caps take the lead. A good fund manager should ideally be able to shift allocations accordingly.

But under this rule, they can’t. Even when mid-cap and small-cap segments turn volatile, the fund must keep 50% of its portfolio locked in these riskier stocks. That makes it difficult to protect investors during downturns.

So, while the intent was good - to bring balance - it has limited the flexibility that fund managers once had.

Are investors taking on more risk than they realize?

Let’s be honest - most investors look at multi-cap funds and assume they are “safer” because they’re diversified. But that’s not always true.

During bullish markets, mid and small-cap stocks can skyrocket, boosting returns. However, during market corrections, they also fall harder. Because of the rule, multi-cap funds must still maintain exposure to these stocks, which increases the downside risk.

This means investors might face sharper declines in the short term, even though they expected a more balanced experience.

That’s why understanding risk tolerance and investment horizon is essential before investing in these funds.

Are multi-cap funds still worth considering?

Multi-cap funds aren’t bad - they’re just structured differently. The 25% rule makes them more predictable in allocation but less adaptable.

For long-term investors who prefer staying invested across all market segments, these funds can still make sense. But, for those looking for active management and market-timed allocation, flexi-cap funds might offer more freedom.

But we suggest that you should align the fund type with your risk appetite, time horizon, and financial goals, instead of just chasing past returns. Always.

Conclusion

Multi-cap funds are designed to offer “something for everyone.” But as the 25% rule shows, sometimes regulations that aim for fairness can also create new challenges.

As investors, it’s important to look beyond the label and understand what’s inside your fund. A little knowledge can go a long way in making informed, confident decisions that protect your wealth in every market condition.

Q&A

Q1. What is a multi-cap mutual fund?

A: A multi-cap fund invests in large-cap, mid-cap, and small-cap companies, ensuring a balanced portfolio across market segments.

Q2. What is the 25% rule in multi-cap funds?

A: The rule mandates that 25% each of a fund’s equity allocation must go to large, mid, and small-cap stocks.

Q3. Do multi-cap funds carry high risk?

A: Yes, during market downturns, their fixed exposure to small and mid-caps can increase volatility.