The Multi-Cap Equation: Can One Fund Balance Risk and Reward?

As simplicity becomes the new investing mantra, Multi-Cap Funds offer a onestop route to diversification. But can a fund with fixed exposure across market caps truly balance risk, reward, and investor behaviour through volatile cycles? Abhishek Wani’s data-backed analysis puts that to the test, revealing whether Multi-Cap Funds live up to their promise or whether DIY and passive approaches offer a better fit for different investor profiles [EasyDNNnews:PaidContentStart]

A Tale of Three Investors
Picture three investors, each chasing the same goal: wealth creation through equity mutual funds but taking very different routes. One trusts in the expertise of fund managers and chooses a Multi-Cap Fund. The second prefers control, building a custom portfolio by blending large-, mid-, and Small-Cap funds. The third takes the passive path, investing in an index fund that mirrors the Nifty 500 Multicap 50:25:25.

All three begin their SIP journey in January 2023, equipped with the same market outlook and investing discipline but led by distinct philosophies. Two and a half years later, the outcomes don’t just reveal who performed better—they uncover deeper truths about structure, behaviour, and strategy .

The Search for the Ideal All-in-One Fund
For retail investors, balancing Large-Cap stability, Mid-Cap growth, and small-cap potential is no easy feat. Even with disciplined SIPs, managing rebalancing and fund selection can be overwhelming. That’s where Multi-Cap Funds come in, offering built-in diversification through SEBI’s 2020 mandate, which requires at least 25 per cent allocation to each marketcap segment. Unlike Flexi-Cap Funds, which allow dynamic shifts, Multi-Cap Funds are rule-bound, providing structure but sacrificing flexibility.

This regulatory shift corrected the earlier issue where many so-called 'multi-cap' funds were heavily skewed towards large-caps, resulting in a truly diversified product by design. For hands-off investors, this simplifies asset allocation while ensuring exposure to all segments of the market.

However, the structure has trade-offs. When small- and mid-caps underperform, the mandated exposure becomes a drag—while Flexi-Cap managers can pivot to safer ground, Multi-Cap Funds must stay the course. In volatile markets marked by sector churn and shifting FII flows, this lack of adaptability becomes a key consideration.

So, the central question arises: Can one fund with fixed exposure offer the right risk-reward mix for long-term investors? Or are DIY (Do It Yourself) strategies and passive index options more effective—offering greater control, adaptability, or simplicity? With rising volatility, macro shifts, and foreign fund outflows unsettling investors, there’s renewed interest in simplified 'all-in-one' solutions. Multi-Cap Funds, by design, offer diversification. But do they deliver? And are they enough to be the core of an equity portfolio?

Setting the Stage – What Are Multi-Cap Funds, DIY Portfolios, and the Benchmark?

Multi-Cap Funds allocate across large-, mid-, and small-cap stocks, with diversification built into their design. While some retain flexibility in allocation, others, particularly post-SEBI’s 2020 mandate, follow a fixed 25 per cent minimum allocation to each segment—balancing simplicity with structural discipline.

In contrast, DIY portfolios offer control, letting investors handpick funds across market caps. In our case study, this strategy involved equal (33.3 per cent) allocation to top large-, mid-, and small-cap schemes, including ICICI Pru Bluechip, HDFC Midcap Opportunities, and Nippon India Small Cap.

The passive benchmark in our comparison is the Nifty 500 Multicap 50:25:25 Index, which mirrors SEBI’s prescribed structure with a static allocation—50 per cent large, 25 per cent mid, and 25 per cent small caps—making it a proxy for the ideal diversified equity exposure.

Methodology in Brief – Building a Likefor-Like Comparison
To evaluate how well Multi-Cap Funds balance risk and reward, we tracked 1-year rolling returns from January 2023 to June 15, 2025—capturing nearly 600 days of market fluctuations, including interest rate cycles, small-cap volatility, and FII movements.

We analysed three portfolios: (1) the top three Multi-Cap Funds by AUM launched before 2022—HDFC, Nippon India, and Kotak; (2) a DIY portfolio with equal allocation to top AUM large-, mid-, and small-cap funds, rebalanced annually; and (3) the Nifty 500 Multicap 50:25:25 Index, serving as the passive benchmark.

Returns were evaluated using monthly 1-year rolling data, reflecting real-world SIP investor experiences and short-term behaviour patterns. Risk-adjusted performance was assessed using Sharpe, Sortino, and Calmar ratios, along with standard deviation, maximum drawdown, and upside/downside capture—offering a comprehensive view of consistency, volatility, and suitability across market conditions.

Analysis: The Multi-Cap Fund Promise— Does It Hold?
Going Beyond Returns – Why Risk-Adjusted Metrics Matter
Absolute returns often dominate headlines, but they rarely tell the full story. What truly defines an investor’s experience is the quality of those returns—how volatile they were, how much downside risk was involved, and how resilient the strategy proved during market stress.

To dig deeper, we adopted a 1-year rolling return framework (January 2023 – June 15, 2025), allowing us to examine how Multi-Cap Funds, the Nifty 500 Multi-Cap 50:25:25 index, and a DIY three-fund portfolio fared across market cycles— bullish, corrective, or sideways. But even that’s just the beginning.

Mean, Median, and Extremes
We analysed key return statistics to understand how predictable or volatile each strategy felt to investors. Consistency was measured using mean and median returns, while emotional thresholds were assessed through minimum and maximum returns.

The DIY portfolio achieved the highest average and median returns, with minimal deviation between the two—signalling consistent performance. Multi-Cap Funds also showed strong stability, with the median return higher than the mean— suggesting dependable compounding, especially attractive for SIP investors.

Emotionally, the DIY strategy provided the most reassuring journey—recording the smallest drawdown. However, MultiCap Funds posted the highest maximum return (71.56 per cent), showcasing their ability to seize opportunities during bull phases.

The more fundamental investor question is:
‘What am I actually getting in return for the risk I’m taking?’ To truly assess which investment strategy best serves investors, we moved beyond absolute returns and examined riskadjusted metrics and behavioural realities. This framework offers a clearer picture of how each approach performs not just in numbers but in actual investor experience.

We structured our evaluation around three key dimensions:

A. Risk-Adjusted Performance
Face-Off Are Multi-Cap Mutual Funds delivering smoother returns? Does a DIY strategy offer better alpha but at a cost? Are benchmarks biased by large-cap concentration? To explore these, we compared the Sharpe, Sortino, and Calmar Ratios—core measures of consistency, downside risk management, and drawdown resilience.

The DIY portfolio led with the highest Sharpe and Calmar ratios, reflecting strong returns per unit of both total and downside risk. However, Multi-Cap Funds weren’t far behind—indicating that professional fund managers effectively delivered a smooth ride through volatility. The benchmark lagged across all metrics, reinforcing the limits of passive static allocation.

Key takeaway: While DIY delivered marginally higher risk-adjusted returns, Multi-Cap Funds offered a more stable and investor-friendly path—especially important for longterm SIP investors and those with lower risk appetite.

B. Downside Resilience & Volatility: The Real Test
Returns are attractive, but can investors emotionally withstand the journey? To measure pain tolerance, we examined volatility, maximum drawdown, and downside capture.

Despite having a higher allocation to small caps, the DIY strategy recorded the lowest drawdown, thanks to disciplined allocation and fund selection. This matters deeply for retail investors, where panic-driven redemptions often follow downturns. Reducing emotional stress is as crucial as chasing alpha.

C. Market Cycle Participation – Riding the Waves
Do strategies adapt well across bull and bear cycles? We assessed this using Upside and Downside Capture Ratios, which reveal how each approach behaved in extreme conditions.

DIY once again led in bull market participation while simultaneously protecting capital in downturns. Multi-Cap Funds followed closely, showing strong active management decisions to tap upside potential. The benchmark, by contrast, failed to adapt, sacrificing both protection and performance due to its rigid structure.

Comparative Frequency Distribution of Average Returns
This chart shows the frequency distribution of 1-year rolling returns (Jan 2023–June 15, 2025) for three strategies: Multi Cap Mutual Funds, a DIY Portfolio (equal exposure to Large, Mid, and Small Caps), and the NIFTY 500 MULTICAP benchmark. It maps how often returns fell within specific bands, highlighting each strategy’s average return and behaviour across varying market conditions.

The comparative frequency distribution chart provides powerful insights into how different strategies behaved across return bands. While the DIY Portfolio edges out with the highest average return (37.15 per cent), it's not just about the average—it’s the concentration of high-return outcomes that stands out. The DIY strategy most frequently achieved returns in the 40–50 per cent (156 observations) and 50–60 per cent bands (85 observations), far exceeding the NIFTY 500 MULTICAP and even outperforming Multi-Cap Funds in these zones. This highlights its superior upside capture and aggressive participation during rallies—benefits likely stemming from active allocation across high-performing segments.

However, Multi-Cap Funds, with a solid average return of 35.24 per cent, show a more consistent and controlled distribution, especially in the 30–44 per cent return range, where frequency is high and volatility appears moderated. Their peak frequency (130 observations) in the 43–44 per cent band reflects a well-balanced profile—potentially more comforting for long-term investors prioritising steady compounding over short-term spikes.

In contrast, the NIFTY 500 MULTICAP, despite being the broadest benchmark, lags with an average return of just 29.02 per cent, and clusters more in the 10–30 per cent bands, including the most frequent presence in the 30–40 per cent zone (152 observations). Its limited exposure to high-return bands and appearance in the <0 per cent range underscores its lack of both upside participation and downside protection— attributes often enhanced by active allocation in both DIY and Multi-Cap Fund strategies.

While the DIY Portfolio outperformed in return magnitude and frequency of high outcomes, Multi-Cap Funds offered the best trade-off between performance consistency and risk management, making them especially compelling for passive investors seeking dependable growth without active involvement. Against the NIFTY 500 MULTICAP benchmark, both approaches decisively demonstrate the value of diversified, multi-cap exposure—whether constructed or professionally managed.

Balancing Brilliance and Behaviour: DIY vs Multi-Cap Funds
When viewed through the lens of risk-adjusted returns, downside stress, and market adaptability, DIY portfolios outshine on metrics—but require more effort, skill, and emotional discipline. Multi-Cap Mutual Funds, meanwhile, emerge as a professionally managed, smoother alternative— striking a compelling balance between alpha and assurance. A closer look at behavioural metrics—like maximum and minimum returns and capture ratios—highlights how each strategy might feel to an investor over time. The DIY strategy, though requiring more effort, offered the steadiest ride with minimal downside pain and strong upside reward. Multi-Cap Funds delivered consistent returns, with a higher median than mean—suggesting smooth compounding well-suited for systematic investors. In contrast, the benchmark subjected investors to frequent drawdowns (nearly 30 out of all rolling 1-year periods ended in negative returns), eroding investor confidence during downturns.

Notably, all three strategies reported near-zero downside capture—a promising sign. However, only DIY and Multi-Cap Funds converted that downside protection into superior upside participation. This underscores a key principle: long-term success hinges not just on avoiding losses but on fully capturing opportunities when markets rise.

Limitations of the Study
While this analysis offers meaningful insights, it is important to view the findings within context. The study is limited to 1-year rolling returns from January 2023 to June 15, 2025—a relatively short window shaped by fund inception timelines and SEBI’s 2021 reclassification. This restricts visibility across a full market cycle, limiting the assessment of long-term consistency and resilience.

Additionally, short-duration return data is susceptible to noise from temporary dislocations, such as FII flows or sectorspecific volatility. Metrics like the Calmar Ratio, based on maximum drawdowns, may also understate actual risk in this compressed timeframe. These constraints don’t diminish the study’s value but do warrant caution in extrapolating results to broader investment scenarios.

What Kind of Investor Should Choose What?

The Ideal DIY Investor – Active, Analytical, and Tax-Aware
The Do-It-Yourself (DIY) portfolio stands out as a potent option for hands-on investors who enjoy being actively involved in their financial decisions. With its superior mean (37.21 per cent) and median (41.17 per cent) returns, highest Sharpe (1.62) and Calmar (1.71) ratios, and exceptional upside capture (128.09 per cent), the DIY strategy rewards those who are disciplined, market-savvy, and committed to periodic rebalancing. It effectively limited downside risks—its worst 1-year return was just -0.19 per cent—while capitalising aggressively during rallies, particularly in bullish periods like late 2023 and early 2024.

Crucially, the frequency distribution of 1-year rolling returns between January 2023 and June 2025 further cements its appeal. The DIY approach recorded the highest concentration of outcomes in the 40–50 per cent (156 observations) and 50–60 per cent (85 observations) return bands, far surpassing Multi-Cap Funds and the benchmark. This indicates not just strong average performance but frequent high-return outcomes—an edge that stems from active allocation across large, mid, and small-cap funds. However, this high reward comes with a complexity cost. Unlike Multi-Cap Funds that rebalance internally, DIY portfolios require investors to periodically sell and buy units, triggering capital gains tax.

With the updated Finance Bill 2025, long-term capital gains over ₹1.25 lakh are taxed at 12.5 per cent, while short-term gains are taxed at 15 per cent. This tax leakage, though manageable, can gradually erode net returns. Additionally, investors must maintain accurate records of transactions for tax filing, increasing administrative effort. Thus, DIY suits those who are not only proactive with market movements but also meticulous with tax planning—a strategy for the wellinformed, not the passive.

The Multi-Cap Fund Investor – Balanced, Passive, Yet Growth-Oriented
For investors who value simplicity but still want exposure across market caps, actively managed Multi-Cap Funds offer the ideal middle ground. These funds delivered impressive mean (35.29 per cent) and median (38.93 per cent) returns, with strong Sharpe (1.45), Sortino (1.63), and Calmar (1.32) ratios—underscoring their ability to navigate volatile periods like the 2023 banking scare or the small-cap correction with minimal drawdowns (max loss: -1.19 per cent). Their volatility (19.46 per cent) remained well-contained, thanks to dynamic allocation by fund managers based on macro and sectoral trends.

The frequency distribution analysis highlights their appeal for passive investors seeking smoother compounding. Multi-Cap Funds showed high consistency in the 30–44 per cent return range, with peak frequency (130 observations) in the 43–44 per cent band—demonstrating a well-balanced risk-return profile. While they didn’t match DIY’s peak returns, their internal rebalancing avoids tax events, enhancing post-tax efficiency. This makes them highly suitable for investors with moderate risk tolerance, limited time or expertise, and a preference for long-term capital appreciation without the need for continuous monitoring. Their dependable performance, smart diversification, and stress-free execution offer an emotionally stable journey for wealth builders.

The Benchmark Follower – Simple Exposure, But Lower Efficiency
The Nifty 500 Multi-Cap 50:25:25 index, while offering broad-based exposure to large, mid, and small caps in fixed proportions, falls short when evaluated through risk-adjusted lenses. With the lowest mean return (28.60 per cent), weakest Sharpe (1.18), Sortino (0.86), and Calmar (1.09) ratios, and the steepest maximum drawdown (-10.13 per cent), it struggled to adapt during corrections and capitalise during rallies. Even though it had the lowest volatility (18.3 per cent), the lack of dynamic allocation limited its effectiveness.

The frequency distribution of 1-year rolling returns further confirms this inefficiency. With an average return of just 29.02 per cent, the index most frequently clustered in the 30–40 per cent return band (152 observations), while also appearing in the <0 per cent zone—evidence of poor downside protection and muted upside participation. As a passive construct, it lacks the flexibility to adjust to macro shifts, making it less suitable as a standalone strategy for long-term investors. However, for those seeking minimal involvement and broad market exposure at low cost, it serves as a reasonable benchmarking tool. New investors may consider combining such index funds with SIPs or pairing them with active strategies to mitigate volatility and improve risk-adjusted outcomes. On its own, though, it lacks both the defence of Multi-Cap Funds and the aggression of DIY portfolios—making it the least optimal path for most wealth-seeking investors.

Conclusion
In the end, it's not just about how much you earn—but how consistently and comfortably you earn it. The DIY portfolio demonstrated how informed effort and disciplined rebalancing can unlock market-beating potential, especially in small- and mid-cap heavy environments. Multi-Cap Funds, though slightly behind in returns, offered a compelling trade-off: professional asset allocation, emotional ease, and tax efficiency—all critical for long-term wealth creation. The Nifty 500 Multi-Cap Index, while simple and cost-efficient, highlighted the limitations of a static approach in a dynamic market.

Ultimately, the data tells us this: the best strategy isn't the one with the highest return on paper—it's the one you can stick with through cycles. Aligning your investment method with your mindset is the real alpha.

Call to Action:
Before choosing your next equity fund, ask yourself—not just what will grow my money, but what will help me stay the course? In investing, clarity, not complexity, compounds best.

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