What Are Multi Cap Funds
What are multi cap funds? They are equity mutual fund schemes that must invest at least 25% of their total assets in each of three market capitalisation groups: large cap, mid cap and small cap companies. At least 75% of total assets must be invested in equity and equity-related instruments. The remaining portion follows the category’s permitted investment rules.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers. We name no scheme on this page. The choice is yours.
Multi cap funds at a glance
- Minimum equity allocation: 75% of total assets.
- Large cap allocation: At least 25% of total assets.
- Mid cap allocation: At least 25% of total assets.
- Small cap allocation: At least 25% of total assets.
- Remaining allocation: Up to 25% of total assets outside the three minimum allocations, subject to the scheme’s permitted investments.
- Main distinction: Unlike flexi cap funds, multi cap funds must maintain minimum allocations to all three market cap groups.
- Tax: The applicable treatment depends on the fund’s statutory classification, the holding period and the transaction conditions.
Multi cap funds at a glance
- Minimum equity allocation 75% of total assets.
- Large cap allocation At least 25% of total assets.
- Mid cap allocation At least 25% of total assets.
- Small cap allocation At least 25% of total assets.
- Remaining allocation Up to 25% of total assets outside the three minimum allocations, subject to the scheme’s permitted investments.
- Main distinction Unlike flexi cap funds, multi cap funds must maintain minimum allocations to all three market cap groups.
- Tax The applicable treatment depends on the fund’s statutory classification, the holding period and the transaction conditions.
How does the 25% rule work?
A multi cap fund must allocate at least one-quarter of its total assets to each of the large cap, mid cap and small cap categories. These minimums are calculated against total assets, not just the equity portion. The scheme must also maintain at least 75% of total assets in equity and equity-related instruments.
The minimum allocations work like this:
| Portfolio allocation | Minimum share of total assets |
|---|---|
| Large cap companies | 25% |
| Mid cap companies | 25% |
| Small cap companies | 25% |
| Total equity and equity-related instruments | 75% |
For example, imagine a multi cap fund with total assets of ₹100 crore. At least ₹25 crore must be allocated to large cap companies, ₹25 crore to mid cap companies and ₹25 crore to small cap companies. The three minimums account for ₹75 crore in total.
The remaining ₹25 crore is not an unrestricted fourth allocation. Its use must follow the category’s rules and the scheme’s investment mandate. The manager cannot reduce one of the three required allocations below its minimum simply to increase another.
SEBI’s Master Circular for Mutual Funds dated 20 March 2026 sets out these category requirements in paragraph 3.8.1. The framework specifies a 75% minimum equity allocation and a 25% minimum in each market cap band.
What can a multi cap fund do with the remaining 25%?
After meeting the three minimum allocations, a multi cap fund has a remaining portion of up to 25% of total assets. The category rules permit this portion to be allocated within the framework for equity schemes, including equity, money market instruments and other permitted liquid instruments. The scheme’s documents set out its investment mandate.
Consider a portfolio that holds 30% in large caps, 25% in mid caps and 25% in small caps. It has allocated 80% of total assets to those three groups, leaving 20% for the remaining permitted investments.
The manager may change the allocation within the category’s limits, but the three minimums still apply. A larger allocation to large caps cannot come at the expense of the required 25% minimum in mid caps or small caps.
This is the important distinction: the flexible portion allows some variation in the portfolio, but it does not remove the category’s allocation floors. The actual holdings and any permitted ranges are disclosed in the scheme’s documents.
Multi cap funds vs flexi cap funds
Multi cap and flexi cap funds can both invest across companies of different sizes. Their key difference is the minimum allocation rule. A multi cap fund must allocate at least 25% of total assets to each market cap group, while a flexi cap fund must maintain at least 65% in equity and equity-related instruments without a category-level minimum for each cap group.
| Feature | Multi cap fund | Flexi cap fund |
|---|---|---|
| Minimum equity allocation | 75% of total assets | 65% of total assets |
| Large cap minimum | 25% of total assets | No category-level minimum |
| Mid cap minimum | 25% of total assets | No category-level minimum |
| Small cap minimum | 25% of total assets | No category-level minimum |
| Allocation flexibility | Three market cap minimums must be maintained | No minimum allocation to an individual market cap group |
| Main structural rule | Required exposure across all three cap groups | Allocation across cap groups can vary within scheme rules |
A multi cap fund cannot abandon one of the three market cap groups while remaining within its category requirements. A flexi cap fund does not have the same category-level floors for large, mid and small caps.
Neither category name tells the whole story of a particular portfolio. Actual holdings, sector exposure, concentration and investment limits can differ between schemes. The scheme information document and portfolio disclosures provide the details for each scheme.
For related definitions, see types of mutual funds.
How are large, mid and small cap companies classified?
Market capitalisation is the total market value of a company’s outstanding shares. Mutual fund categorisation uses the ranking published by the Association of Mutual Funds in India (AMFI), based on full market capitalisation.
Under the standard ranking system:
- Large cap: Companies ranked from 1 to 100.
- Mid cap: Companies ranked from 101 to 250.
- Small cap: Companies ranked 251 onwards.
These are ranking bands, not fixed rupee thresholds. A company’s market capitalisation can change as its share price and the broader market move. Its classification depends on the published ranking rather than on whether its share price appears high or low.
AMFI publishes the list used for classification periodically. When a company moves into a different band, its classification in a fund’s portfolio may change. This can affect how the scheme’s holdings count towards its required allocations.
What happens when a company changes market cap category?
A company can move between large cap, mid cap and small cap bands when the official ranking changes. That change can affect a multi cap fund’s allocation calculations even if the manager has not bought or sold any shares. The portfolio must still meet the category requirements under SEBI’s framework.
For example, a holding previously classified as a mid cap company may be placed in the large cap band after a new classification list takes effect. Its value then counts towards the large cap allocation rather than the mid cap allocation.
If a reclassification causes a portfolio to fall below a required minimum, the fund must follow the applicable regulatory timeline and process to restore compliance. The precise timeline should be checked against the current SEBI framework and the scheme’s disclosures; it should not be assumed from the category name alone.
Portfolio changes can also involve transaction costs and market-price movements. Monthly portfolio disclosures and scheme factsheets help readers track the actual allocation over time.
What risks apply to multi cap funds?
Multi cap funds invest across large, mid and small cap companies, so their portfolios are exposed to equity market movements in all three groups. The mandatory allocation floors mean the scheme must retain exposure to mid and small caps even when those segments face difficult market conditions. Diversification does not eliminate market losses.
Market risk: Share prices can decline across all three market cap groups during a broad market downturn. A portfolio spread across many companies can still lose value when markets fall.
Mid and small cap volatility: Smaller companies can experience sharper price movements and may have less trading activity than larger companies. Their prices can be affected by business conditions, funding access, earnings changes and market sentiment.
Liquidity risk: Some shares may be harder to sell quickly at the expected price. During stressed markets, the gap between a quoted price and the price achieved on a sale can widen.
Sector concentration: A fund may have significant exposure to particular industries, depending on the companies it holds. A downturn affecting one sector can influence several holdings at once.
Portfolio and manager risk: Actual results depend on the companies held, the allocation within the permitted range and the manager’s decisions. The 25% rule sets minimum allocations; it does not cap losses or guarantee returns.
Review the scheme’s investment mandate, current portfolio, sector exposure and risk disclosures before making a transaction. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.
How are multi cap fund gains taxed?
Tax treatment depends on the fund’s statutory classification, the date units were acquired, the holding period and the conditions applying to the sale. Multi cap funds are equity-oriented by category, but the relevant equity tax treatment must still be considered under the statutory tests and transaction conditions.
Under the Income-tax Act, 2025, Section 196 covers short-term capital gains on qualifying equity-oriented fund units transferred under the specified conditions, including the relevant securities transaction tax (STT) requirements. The applicable rate is 20%.
Section 198 covers long-term capital gains on qualifying assets, including equity-oriented fund units, when its conditions are met. The applicable rate is 12.5% on aggregate qualifying long-term capital gains above ₹1,25,000 in the financial year. Section 198(8) sets out the relevant test for an equity-oriented fund.
For a qualifying equity-oriented fund, the holding period determines whether the gain is short-term or long-term. Units held for 12 months or less fall under the short-term rule, while units held for more than 12 months may fall under the long-term rule, provided the other statutory conditions are met.
Illustrative long-term capital gain calculation
Suppose an investor purchases units for ₹3,00,000 and later redeems them for ₹4,80,000. Assume the units qualify for long-term equity capital gains treatment, the annual ₹1,25,000 exemption is fully available, STT conditions are met and no surcharge applies.
| Calculation | Amount |
|---|---|
| Redemption proceeds | ₹4,80,000 |
| Original cost | ₹3,00,000 |
| Long-term capital gain | ₹1,80,000 |
| Less annual exemption | ₹1,25,000 |
| Taxable gain | ₹55,000 |
| Tax at 12.5% | ₹6,875 |
| Health and education cess at 4% | ₹275 |
| Illustrative total tax | ₹7,150 |
This calculation is an example, not an estimate of an individual’s tax liability. The annual exemption depends on the taxpayer’s qualifying gains for that financial year. Other gains, surcharge, tax regime and statutory changes can affect the final amount.
Health and education cess is 4% of income tax plus surcharge, if any. Cess is not itself a surcharge. Tax rules can change through legislation and Budget amendments, so confirm your own tax position with a chartered accountant.
Frequently asked questions
A multi cap fund must allocate at least 25% of its total assets to large cap companies. It must also allocate at least 25% each to mid cap and small cap companies.
The category requires at least 25% of total assets in mid caps and 25% in small caps. That leaves at most 50% of total assets for large caps if the remaining flexible portion is also invested in large caps and the other category requirements are met.
No. A multi cap fund has a 25% minimum allocation to each of the three market cap groups and a 75% minimum equity allocation. A flexi cap fund has a 65% minimum equity allocation but no category-level minimum for each market cap group.
The category rules require at least 25% of total assets in each of the large cap, mid cap and small cap groups. Those three minimums together account for 75% of total assets.
Check the scheme’s latest portfolio disclosure and factsheet. These show the holdings and provide information about the portfolio’s market cap and sector exposure. The category label alone does not show the current allocation.
Tax depends on the fund’s statutory classification, the holding period, the transaction conditions and the investor’s position. Qualifying equity-oriented funds may fall under the equity capital gains rules in Sections 196 and 198 of the Income-tax Act, 2025.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.