Smart Allocation of Large-Cap, Mid-Cap and Small-Cap Funds


Smart Allocation of Large-Cap, Mid-Cap and Small-Cap Funds in 2023

The smart combination of large caps, mid-caps, and small caps results in a good-performing multi-cap fund. The golden opportunity to get exposure to all three types of funds is what tends to draw investors to invest in the multi-cap mutual fund.
One can take advantage of investment opportunities across a wider range of the market by using a multi cap, which is why this type of investment vehicle is regarded as the superior choice for wealth creation.

How does market cap affect investing?

Multiplying the stock price by the number of outstanding shares gives the market capitalization. Market capitalization is an accurate way to measure a public company’s size. Larger companies tend to have higher market caps than
smaller ones. A stock’s market capitalization, or size, influences its risk and return characteristics. Larger companies are more reliable. They are the industry leader and can easily withstand financial setbacks. Smaller firms have faster earnings growth but are more sensitive to business cycles. To make smart financial decisions, you must access the risks associated with the instrument you are investing in.

The Securities and Exchange Board of India (SEBI), the country’s stock market regulatory body, categorises stocks into three market-cap segments:

Large Cap :

The top 100 companies by market capitalization are classified as “large cap” companies.

Mid-Cap :

Companies ranked 101st to 250th in terms of market capitalization are classified as mid-caps by SEBI. Over 150 companies fall under the “mid-cap” segment.

Small Cap :

According to market capitalization, SEBI classifies companies that are ranked 251st or lower as small caps.

What is the Multicap approach to investing?

Investing in companies with different market caps (large cap, mid cap, and small cap) is called “multi-cap,” a type of equity investment strategy. A multi-cap strategy is fundamentally an equity asset class diversification strategy. Multi-cap funds are a type of equity fund that employs the multi-cap investment strategy.

Multi-cap funds are mandated by SEBI to invest a minimum of 25% of their assets in large-cap stocks, 25% in mid-cap stocks, and 25% in small-cap stocks. As a result, multi-cap funds will always have at least 50% exposure to small-cap and mid-cap stocks.

graph risk and return
Multicap Strategy Stocks' Advantages.


Market cap segments within the equity asset class experience cyclical periods of success. So, during different phases of the market’s life cycle, various market segments outperform each other. During bear markets, large-cap stocks typically outperform small- and mid-caps. During the early to middle stages of bull markets, small and midcap stocks typically outperform large caps. Multicap investing balances risk and return over investment cycles.


When compared to large caps, small/mid-caps allow you to diversify across more industries. Industries like automobile accessories, specialty chemicals, textiles, media and entertainment, etc., have high demand-driven growth potential but are largely untapped by large caps. Some midcap sectors have high export growth potential. Mid and small caps can benefit from large global corporations’ new “China plus 1” strategy as they diversify their manufacturing base and supply chain after the COVID-19 pandemic.

Comparison of Mutual Funds with Gold and FD
graph risk and return


When compared to market cap-specific investment strategies, multi cap strategies expose you to a much wider universe of stocks. The mid cap segment, like the large cap segment, is limited to 150 stocks. A multi cap strategy will expose you to a much larger universe of stocks (500+ stocks), i.e., various new investment opportunities.


 High institutional ownership and research coverage make large-cap stock price discovery more efficient. However, the small-cap market is particularly affected by inefficient price discovery. Fund managers can identify mid-cap and small-cap stocks trading at deep discounts to their intrinsic long-term valuation and create alpha for investors over long investment horizons.

Compared to a large-cap strategy, a multi-cap approach has a better chance of generating alpha, according to past data. The graph below compares the growth of a Rs 10,000 investment in Nifty 500 Multicap 50:25:25 TRI (a multi-cap benchmark index) to Nifty 100 TRI (a large cap benchmark index). In comparison to the large cap Nifty 100 TRI, which gave 14% CAGR over the last 10 years, the Nifty 500 Multicap 50:25:25 TRI gave 15% CAGR.

historic data

Source: Advisor Khoj, as on 24th December 2022. Nifty 100 TRI represents large caps, while Nifty 500 Multicap 50:25:25 TRI represents multi-caps. Disclaimer: Mutual funds are subject to market risks. Past performance may or may not be sustained in the future. The above graph is provided solely for the purpose of educating investors and should not be taken as specific investment advice. Risk profiles vary across different market cap segments. You should invest based on your risk appetite and consult a financial advisor if necessary.

Who should consider investing in Multicap funds?

Long-term investors who are looking for capital growth or wealth creation.

When investing in Multicap funds, your risk tolerance should be high to very high.

Minimum 5-year investment terms for these funds

Using a lump sum or a SIP, you can invest in Multicap funds.

If Multicap funds are a good fit for your long-term investment needs, consult your

mutual fund distributor or financial advisor.

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Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.