The multi-cap fund category was introduced by SEBI in February 2021, requiring schemes to allocate at least 25 per cent each to large-cap, mid-cap and small-cap stocks. Today, the category comprises 32 schemes. Among them, only two funds from Invesco Mutual Fund and Nippon India Mutual Fund have maintained a portfolio structure broadly aligned with the current multi-cap mandate for more than seven years.

Within the category, Nippon India Multi Cap Fund (NMCF) has emerged as a strong performer. With assets under management of ₹53,411 crore, it has delivered the highest five-year return among multi-cap funds. Even before SEBI formalised the category in 2021, the fund maintained 16-25 per cent exposure to small-cap stocks while allocating at least a quarter of its portfolio each to large-cap and mid-cap companies.

Launched in March 2005, the scheme has built a two-decade track record of returns, delivering a compounded annualised return of 17.4 per cent since inception. The fund has also benefitted from continuity in management, with Sailesh Raj Bhan at the helm since launch.

Investment approach

NMCF typically evaluates investments with a three- to five-year horizon and often holds quality businesses for much longer. This approach has resulted in a portfolio turnover ratio of about 29 per cent, one of the lowest in the category, where the average is around 80 per cent. Several holdings, including SBI and Infosys, have remained in the portfolio for nearly two decades.

Stock selection is guided by three pillars: Business quality, management quality and valuation. The fund seeks companies with durable competitive advantages, capable management teams and strong governance standards. At the same time, it remains valuation conscious, avoiding businesses where future growth expectations are already fully priced in.

A key metric in its evaluation framework is return on equity (RoE). Preference is given to companies capable of sustaining or achieving 15-20 per cent RoE over the medium term, enabling them to fund growth internally and minimise shareholder dilution.

The fund also adopts a contrarian lens, identifying sectors and companies where valuations have been compressed by temporary external factors rather than a deterioration in fundamentals. It looks for under-owned stocks where investor interest has faded despite improving earnings prospects. In emerging businesses, the focus extends beyond financial metrics.

Portfolio construction combines large-, mid- and small-cap stocks, with a strong emphasis on bottom-up stock selection and compounding. Over the years, the fund has broadly maintained 40-45 per cent allocation to large-caps, 25-30 per cent to mid-caps and 25-30 per cent to small-caps.

Small-cap allocation with risk control

Unlike most other equity fund categories, multi-cap funds tend to hold a larger number of stocks, particularly within the small-cap segment, irrespective of asset size. This diversification helps mitigate stock-specific and liquidity risks while allowing participation in the potential of smaller companies.

For instance, WhiteOak Capital Multi Cap Fund and ICICI Prudential Multi Cap Fund held 179 and 162 stocks respectively as of May 2026. NMCF itself owns 123 stocks, of which 58 are small-cap companies.

According to the fund manager, small-cap investing is approached with a long-term perspective, with holdings often retained for several years to allow businesses to realise their potential. Importantly, the small-cap universe itself has evolved. Many companies classified as small-caps today have market capitalisations exceeding ₹10,000 crore, making them significantly larger and more liquid than traditional small-cap companies of the past.

Reflecting this approach, 80-90 per cent of the fund’s small-cap allocation is invested in companies with market capitalisations above ₹10,000 crore. Exposure to companies with market values below ₹5,000 crore accounts for less than 5 per cent of the overall portfolio, limiting liquidity risk.

Currently, the fund is overweight on private sector banks, pharmaceuticals, consumer discretionary businesses and the power sector. The fund manager finds private sector banks particularly attractive, noting that sustained foreign institutional investor selling over the past two years has depressed valuations.

Conversely, the fund remains selectively underweight on IT services and metals. Its largest sector exposures are banks, retailing and electrical equipment. Over the past year, allocations to pharmaceuticals, retailing and consumer durables have increased, while exposure to finance, capital markets and banks has been pared back.

Performance

Over rolling five-year periods during the past seven years, the fund delivered an average annualised return of 26 per cent compared with 22 per cent for the Nifty500 Multicap 50:25:25 TRI. Across these periods, annualised returns ranged between 18 per cent and 36 per cent. On a three-year rolling basis, the fund generated an average annualised return of 25 per cent, ahead of the category average of 21 per cent.

The regular plan carries an expense ratio of 1.43 per cent, lower than the category average of 1.93 per cent. The direct plan’s expense ratio of 0.72 per cent is also marginally below the category average of 0.77 per cent.

Suitability

Multi-cap funds are suitable for investors seeking a single equity fund with exposure across large-, mid- and small-cap segments. The mandated allocation framework enables participation in the stability of large-caps while capturing the growth potential of mid- and small-cap companies.

That said, the compulsory exposure to small-caps can result in greater volatility than flexi-cap funds during market corrections. Investors should therefore have an investment horizon of at least five-seven years and preferably invest through systematic investment plans to ride the market cycles.

The multi-cap category has been excluded from our bl.portfolio MF star rating framework because it contains only two schemes with a track record of at least seven years while adhering to the multi-cap mandate.

Published on June 20, 2026