Building a diversified investment portfolio is important for reducing risk and earning risk-adjusted, optimum returns. A multi-asset allocation mutual fund and a multi-cap mutual fund; both can help you build a diversified investment portfolio. However, there are differences between the two mutual funds. In this article, we will understand the difference between these two types of mutual funds and which one you should choose.
Before we look at the differences between the two types of mutual funds, let us first understand what each of them is.
What is a multi-cap mutual fund?
A multi-cap mutual fund is an open-ended scheme that invests at least 75% of its money in equity and equity-related instruments. The equity allocation is split in the following manner:
- A minimum 25% allocation to large-cap companies
- A minimum 25% allocation to mid-cap companies
- A minimum 25% allocation to small-cap companies
The allocation of the remaining 25% of the scheme’s funds is left to the fund manager’s discretion. As the scheme has a minimum equity exposure of 75%, it is suited to investors with an aggressive risk profile.
Equity has the potential to deliver good returns, as it can benefit from the power of compounding in the long run. Thus, it has the potential to create wealth for long-term investors and help them achieve their financial goals. A multi-cap fund gives exposure to all segments of the equity market across market capitalisation through a single scheme.
What is a multi-asset allocation mutual fund?
A multi-asset allocation mutual fund is an open-ended scheme that invests in at least three asset classes. The minimum allocation to each asset class is at least 10% of the scheme money. The asset classes that the scheme can invest in can include domestic equity, gold and silver, fixed income, real estate investment trusts (REITs), infrastructure investment trusts (InvITs), international equity, etc. Each of these asset classes has a distinct role to play in the investment portfolio:
- Domestic equity is for growth.
- Fixed income is for stability and regular income.
- Gold is a hedge against inflation and a safe haven during times of uncertainty.
- REITs and InvITs are for regular income.
- International equity is for country-specific risk and a hedge against INR depreciation.
A fund manager has the flexibility to take exposure to different asset classes and dynamically shift allocations based on market conditions. For example, when domestic inflation is low, interest rates are low, and GDP growth is high, the fund manager can allocate more money to domestic equities. During periods of trade wars and geographical wars, when economic uncertainty is high, the fund manager can increase gold allocation. When the domestic economy is facing challenges and other countries are doing well, the fund manager can increase allocation to international equity.
As a multi-asset allocation scheme diversifies across multiple asset classes, it carries a relatively lower risk than a multi-cap fund with a higher equity exposure. It is suited to investors with a moderate to aggressive risk profile.
Difference between the two mutual fund schemes
Some differences between a multi-cap fund and a multi-asset allocation fund include the following.
How have the two categories performed?
Now that we understand the difference between the two types of mutual fund schemes, let us look at the returns that they have given.
Provides exposure to at least 3 asset classes, with at least 10% to each asset class through a single scheme.
It is categorised as an equity scheme
It is categorised as a hybrid scheme
It provides limited flexibility to the fund manager, as a minimum 25% allocation is to be maintained in each of the 3 categories at all times.
It provides greater flexibility to the fund manager, as only a 10% minimum allocation has to be maintained in each asset class.
It carries a higher risk with diversification within the equity asset class, but no diversification across asset classes.
It carries a relatively lower risk with diversification across asset classes, and to some extent even with the equity asset class.
It is suited to investors with an aggressive risk profile who are looking for higher exposure to domestic equities spread across market capitalisation.
It is suited to investors with a moderate to aggressive risk profile who are looking for a portfolio spread across various asset classes.
Mutual fund category |
1-year |
3-years |
5-years |
|
Multi-cap funds |
-0.61% |
16.04% |
13.96% |
|
Multi-asset allocation funds |
10.43% |
15.64% |
13.46% |
Source: Value Research website
The above returns are as of 3rd April 2026. The one-year returns are absolute, and the 3 and 5-year returns are CAGR.
The above table shows that multi-cap funds have underperformed over the last one year as stock markets have corrected due to the ongoing US-Iran war, high crude oil prices, Indian Rupee depreciation, etc. During the same period, multi-asset allocation funds have outperformed due to a rally in gold and silver prices
Over the 3- and 5-year periods, there is not much difference in the performance between the two categories. However, within the categories, the performance of the individual schemes can vary widely.
Which one should an investor choose?
Portfolio diversification can be done across asset classes through a multi-asset allocation mutual fund and within the equity asset class through a multi-cap mutual fund. To a certain extent, a multi-asset allocation fund provides both; diversification across asset classes and within the equity asset class. So, a good multi-asset allocation fund should do the job. However, if an investor needs specific equity allocation to large, mid, and small-cap companies, a multi-cap fund can be added.
-0.61%
16.04%
13.96%
Multi-asset allocation funds
10.43%
15.64%
13.46%
Source: Value Research website
The above returns are as of 3rd April 2026. The one-year returns are absolute, and the 3 and 5-year returns are CAGR.
The above table shows that multi-cap funds have underperformed over the last one year as stock markets have corrected due to the ongoing US-Iran war, high crude oil prices, Indian Rupee depreciation, etc. During the same period, multi-asset allocation funds have outperformed due to a rally in gold and silver prices
Over the 3- and 5-year periods, there is not much difference in the performance between the two categories. However, within the categories, the performance of the individual schemes can vary widely.
Which one should an investor choose?
Portfolio diversification can be done across asset classes through a multi-asset allocation mutual fund and within the equity asset class through a multi-cap mutual fund. To a certain extent, a multi-asset allocation fund provides both; diversification across asset classes and within the equity asset class. So, a good multi-asset allocation fund should do the job. However, if an investor needs specific equity allocation to large, mid, and small-cap companies, a multi-cap fund can be added.
