Market cycles are never predictable. One quarter, midcaps may be leading the charts; the next, they could be down 20%. In such volatile conditions, investors wonder: Can diversification within equity categories help cushion the downside?
That is where multi cap funds come into the picture. These funds claim to balance growth and stability. But do they actually offer better downside protection than midcap funds when the market gets choppy? Let’s find out.
What Are Multi Cap Funds?
Multi cap funds are diversified equity schemes that allocate at least 25% each to large-cap, mid-cap and small-cap companies. This mandatory spread is what differentiates them from flexi-cap funds which have no such restrictions and can shift allocations freely.
The structure of multi cap funds ensures a balance: large caps provide stability, midcaps contribute growth and small caps add return potential. In short, multi cap funds are designed to offer the “best of all worlds” though with a few trade-offs along the way.
For example, fund houses like HDFC mutual funds have launched multi cap schemes that blend strong blue chip holdings with emerging businesses, creating portfolios that are diversified both by size and sector.
Why Multi Cap Funds are Better in Market Downturns
Let’s see why multi cap funds may offer more downside protection than pure midcap funds:
1. Exposure to Large Caps Offers Stability
Large cap stocks are large, well-established companies that have steady cash flows and strong financial health. During market downturns, they usually perform better, helping to protect your portfolio from major losses.
2. Dynamic Growth Participation
Downside protection is important, but investors also don’t want to miss out on upside. Multi cap funds with mid and small cap allocation still capture a part of the market recovery once the sentiment improves.
3. Sectoral Diversification Reduces Risk
Multi cap funds have broader sector exposure, balancing cyclical and defensive plays. This mix reduces concentration risk. For example, a decline in one industry (say, IT) doesn’t mean the entire portfolio will decline.
Midcap Funds: The Growth Story with a Catch
Midcap funds focus on companies between top 100 and 250 by market cap. They are growth stage companies. More agile than large caps but more established than small caps. This is perfect for investors looking for higher returns. But the trade off is higher volatility.
- In Bull Markets: Midcaps outperform as earnings and valuations expand fast.
- In Bear Phases: They see sharper corrections as liquidity dries up.
So while midcap funds can give you good returns in rising markets, they don’t offer the comfort of downside protection that a diversified portfolio like multi caps can give you.
Historical Performance: The Context Matters
Historically, multi cap funds have given more stable returns with lower volatility than midcap funds. But in strong bull phases, midcaps have often outperformed due to their higher growth orientation. In short:
- Downturns: Multi caps outperform due to their large cap cushion.
- Upturns: Midcaps surge faster due to higher beta exposure.
So the choice between the two is highly dependent on an investor’s risk appetite and time horizon.
Who Should Consider Multi Cap Funds?
Multi cap funds are for investors who:
- Want exposure to the entire equity spectrum without managing allocations manually.
- Prefer smoother returns and lower drawdowns over aggressive short-term gains.
- Have a high risk appetite and a long-term horizon of 5 years or more.
They are also suitable for investors who want to build core equity in their portfolio but are not sure how to balance between large, mid and small caps.
Final Thoughts
Midcap funds’ growth is attractive in the long term. But when volatility rises or markets get unpredictable, multi cap funds give you a smoother ride. Their diversified structure ensures you are not overexposed to a single segment while you still get to capture opportunities across the board.
