How to Invest During Market Volatility: Multicap vs Multi-Asset Funds

Written by Raghav Goel, MBA (Marketing & Finance), Financial Planner, Founder – WealthCare Vest
Caring for your wealth, strengthening your investment.

Introduction: Should You Change Your Investments When the Market Falls?

Imagine checking your mutual fund portfolio on a Monday morning and discovering that its value has fallen by 5% in just a few weeks. News channels are discussing global uncertainty, social media is full of predictions, and someone in your family suggests withdrawing all your money before the market falls further.

What would you do?

For many investors, market volatility creates confusion. Some stop their Systematic Investment Plans (SIPs), some sell their existing investments, and others start looking for the latest mutual fund that promises better returns.

But reacting to every market movement can make investing unnecessarily complicated.

The better approach is to understand why your portfolio is falling, whether your investments still match your financial goals, and how your money is distributed across different investments.

Two mutual fund categories that investors often consider while building a diversified portfolio are multicap funds and multi-asset allocation funds. Both offer diversification, but they work differently and carry different risks.

In this article, we will understand market volatility, explore these two categories, examine practical examples, and discuss how ordinary Indian investors can make more informed decisions.

What Is Market Volatility?

Market volatility refers to the extent to which investment prices fluctuate over a particular period.

When share prices rise and fall frequently, the market is considered volatile. These movements may be influenced by several factors, including:

• Changes in interest rates and inflation.

• Corporate earnings and business performance.

• International conflicts and geopolitical developments.

• Foreign investor buying or selling.

• Government policies, taxation and economic data.

• Investor expectations, fear and optimism.

For example, an unexpected increase in crude oil prices can affect Indian companies because India imports a significant amount of its oil requirements. Higher input costs may put pressure on businesses, while inflation concerns may influence interest-rate expectations and investor sentiment.

However, a falling market does not automatically mean that every company has become a bad investment. Equally, a rising market does not guarantee that every investment is attractive.

The important point is that market movements are difficult to predict consistently.

Your investment strategy should not depend entirely on guessing what the market will do next.

Why Diversification Matters During Uncertain Markets

Diversification means spreading investments across different companies, industries or asset classes instead of depending on a single investment or market segment.

Consider a simple example.

Suppose an investor puts all their equity investments into small-cap companies. If smaller companies experience a difficult period, the entire equity portfolio may suffer significantly.

Now imagine another investor who holds investments across large-cap, mid-cap and small-cap companies, along with suitable exposure to other asset classes.

The second investor has spread their exposure across different market segments and assets. This may help reduce concentration risk, although it does not eliminate the possibility of losses.

There is an important distinction here: diversification is not about owning as many funds as possible. It is about ensuring that your investments serve different purposes without unnecessary duplication.

For a more detailed explanation, read our guide on How to Create a Diversified Mutual Fund Portfolio: The ₹50,000 SIP Blueprint.

1. What Are Multicap Mutual Funds?

A multicap fund is an equity mutual fund that invests across large-cap, mid-cap and small-cap companies.

Under SEBI's mutual fund categorisation framework, multicap funds must invest at least 75% of their total assets in equity and equity-related instruments, with a minimum allocation of 25% each to large-cap, mid-cap and small-cap stocks.

This structure ensures exposure to all three market-capitalisation segments rather than allowing the fund to concentrate its entire equity allocation in just one of them.

Let's understand what these segments mean.

Large-cap companies

Large-cap companies are among the largest listed businesses in India. They may have established operations, substantial market presence and relatively greater business maturity.

However, large-cap stocks are not risk-free. Their prices can also fall sharply during difficult market conditions.

Mid-cap companies

Mid-cap companies fall between large-cap and small-cap companies in terms of market capitalisation.

Some may be expanding their businesses, entering new markets or increasing their market share. Their growth potential can be attractive, but their share prices can also be more volatile.

Small-cap companies

Small-cap companies are smaller listed businesses that may have significant room to expand.

However, they can also face greater business uncertainty, limited liquidity in their shares, financing challenges and sharper price fluctuations.

Why do investors consider multicap funds?

A multicap fund provides exposure to all three segments through a single mutual fund scheme.

For example, an investor who does not want to select separate large-cap, mid-cap and small-cap funds may consider a multicap fund as one way of accessing these segments.

However, the mandatory exposure to mid-cap and small-cap stocks means investors must be comfortable with meaningful equity-market risk.

Important: A multicap fund is not a capital-protection product. It can experience substantial declines during market corrections, especially when smaller companies face pressure.

2. What Are Multi-Asset Allocation Funds?

A multi-asset allocation fund invests across at least three asset classes and must allocate at least 10% of its total assets to each of those three asset classes, as prescribed under the applicable SEBI mutual fund categorisation framework.

Depending on the scheme, the asset classes may include equity, debt instruments, gold-related investments and other permitted assets.

The exact allocation and investment instruments vary from one scheme to another.

The basic idea is simple: different assets may react differently to the same economic event.

For instance, equity markets may decline during a period of uncertainty, while certain debt instruments or gold-related investments may behave differently. However, this relationship is not guaranteed, and multiple asset classes can fall at the same time.

Understanding the three common asset classes

Equity: Equity investments provide exposure to businesses and may offer long-term growth potential. They also carry market risk and can experience significant losses.

Debt: Debt instruments include government securities, bonds and money-market instruments, depending on the scheme. Their risks may include interest-rate risk, credit risk and liquidity risk.

Gold: Gold-related investments can provide exposure to gold prices. Gold may behave differently from equities during some market conditions, but its price can also decline and it does not generate interest or business earnings in the same way as many other investments.

A simple example

Suppose a hypothetical multi-asset fund has the following allocation:

• 50% in equity.

• 30% in debt instruments.

• 20% in gold-related investments.

These percentages are purely illustrative, not a recommendation or the allocation of any particular scheme.

If equity markets fall, the other assets may help moderate the overall impact, depending on how their prices move during that period.

But if equities, debt instruments and gold-related investments all experience losses, the fund can also lose value.

A multi-asset fund therefore offers diversification across asset classes, not a guarantee that your money will be protected.

3. Multicap vs Multi-Asset Allocation Funds: What Is the Difference?

Although the names sound similar, these categories serve different portfolio roles.

Feature	Multicap fund	Multi-asset allocation fund
Main investment approach	Equity across large-, mid- and small-cap companies	Diversification across at least three asset classes
Equity exposure	Minimum 75% under the applicable category rules	Varies by scheme
Main objective	Long-term equity participation and growth potential	Diversification across asset classes
Key risks	Equity-market, company-specific and liquidity risks	Equity, interest-rate, credit, commodity and other applicable risks
Suitability	Investors who can tolerate significant equity volatility	Investors seeking a diversified asset allocation and who understand the scheme's risks
Capital protection	Not provided	Not provided

Which category is better?

There is no universal answer.

An investor with a long investment horizon and a high tolerance for equity risk may consider multicap funds as part of a suitable portfolio.

Someone seeking exposure to multiple asset classes through one scheme may consider a multi-asset allocation fund, depending on its allocation, investment strategy and personal circumstances.

The right choice depends on your goals, time horizon, financial situation and ability to tolerate losses.

4. Should You Avoid Thematic and Sectoral Mutual Funds During Volatility?

Thematic and sectoral funds invest around a particular theme or industry. Examples include defence, banking, technology, infrastructure and healthcare.

These funds can benefit when the relevant businesses perform well and market expectations are favourable. However, concentrated exposure can also create significant risks.

Imagine that an investor puts most of their equity investments into a single sector because it has delivered strong returns over the previous year.

If that sector subsequently faces regulatory challenges, weaker earnings, expensive valuations or reduced investor interest, the portfolio may suffer more than a broadly diversified portfolio.

This does not mean thematic funds are always unsuitable or that every investor should sell them immediately.

The problem arises when investors confuse a popular investment theme with a complete investment strategy.

A theme may perform well for a period and then underperform for years. Even a promising industry can contain companies whose share prices already reflect optimistic expectations.

Before investing in a thematic or sectoral fund, ask yourself:

• Do I understand the risks associated with this sector?

• Is my portfolio already heavily exposed to the same industry?

• Am I investing because of research or recent performance?

• Can I tolerate a prolonged period of underperformance?

• Does this investment have a defined role in my financial plan?

For a practical discussion of concentrated sector exposure, read our article on HDFC Defence Fund: Should You Continue Your SIP or Switch?.

The aim should not be to avoid every specialised fund. It should be to avoid allowing one theme to dominate your financial future without a clear reason.

5. A Practical Example: How Two Investors May Handle Market Volatility

Consider two hypothetical investors, Amit and Neha.

Both have ₹5 lakh invested in mutual funds.

Amit has invested most of his equity allocation in a single sector because it recently performed well. He expects the same trend to continue.

Neha has built a portfolio based on her financial goals, risk tolerance and investment horizon. Her portfolio includes diversified equity exposure and other suitable investments, with allocations chosen according to her circumstances.

Now imagine that the sector favoured by Amit experiences a sharp correction.

Amit may face a substantial decline because much of his portfolio depends on the same sector. He may feel compelled to sell at an unfavourable time.

Neha may also experience losses. Diversification does not prevent her portfolio from falling, particularly if equity markets decline broadly. However, her exposure to different investments may reduce her dependence on a single sector or asset.

The example illustrates an important principle: the objective of diversification is to manage concentration risk, not to eliminate investment risk.

It also shows why investors should create a portfolio before market conditions become stressful, rather than making every decision in response to the latest headline.

These examples are hypothetical and do not represent actual investor results or guaranteed outcomes.

6. What Should You Do With Your SIP When Markets Are Volatile?

A Systematic Investment Plan, or SIP, allows you to invest a fixed amount in a mutual fund at regular intervals.

During market declines, an SIP purchases units at the prevailing net asset value. When the NAV is lower, the same amount generally purchases more units than when the NAV is higher.

However, this does not mean an SIP guarantees profits or prevents losses. The value of the accumulated units can fall, and an investment can remain below its cost for an extended period.

Before stopping an SIP, consider the following questions.

Has your financial goal changed?

If you are investing for a goal that is still many years away, short-term volatility may not automatically require a change in strategy.

If you need the money soon, however, your portfolio may need to be adjusted to reflect the shorter time horizon.

Has your ability to take risk changed?

A job loss, new financial responsibility or unexpected expense may change your capacity to accept investment losses.

In such situations, reviewing your plan is more useful than blindly continuing or stopping every investment.

Has the fund's investment strategy changed?

Review whether the fund continues to follow its stated mandate, whether its portfolio has changed significantly, and whether there are concerns about its management or investment process.

A falling NAV alone is not enough to conclude that a fund is unsuitable. Equally, a long-term investment horizon does not justify ignoring genuine problems.

Are you investing for the right goal?

An investment meant for retirement may require a different strategy from money needed for a house down payment in two years.

To understand the difference between regular investing and other transaction methods, read our guide to SIP vs SWP vs STP: Complete Guide to Mutual Fund Investment Strategies.

7. Match Your Investments With Your Financial Goals

Before selecting a mutual fund category, decide when you will need the money.

Short-term goals

If you need money within the next one to three years, significant exposure to equity funds may be unsuitable because a market decline could occur just before you need to withdraw the money.

Depending on your circumstances, lower-volatility options such as suitable bank deposits or other appropriate short-term instruments may deserve consideration. These also have their own terms and risks.

Medium-term goals

For goals several years away, the appropriate mix depends on the time available, the flexibility of the goal and how much loss you can tolerate.

Equity exposure should not be selected solely because the expected return appears attractive.

Long-term goals

For retirement or other long-term goals, equity investments may play a role in growth-oriented portfolios. However, the allocation should reflect your risk tolerance and ability to remain invested through difficult periods.

As a goal approaches, it may be necessary to reduce exposure to volatile investments so that a market correction does not jeopardise the planned expenditure.

For more guidance, read How to Choose the Right Retirement Investments.

8. Common Investment Mistakes to Avoid During Market Volatility

Even experienced investors can make poor decisions when markets become uncertain. Here are some mistakes worth avoiding.

Chasing last year's top-performing fund: Past performance does not guarantee future results. A fund that benefited from a particular market trend may not repeat that performance.

Buying too many mutual funds: Owning ten funds does not automatically mean you are diversified. Different funds may hold many of the same companies, creating overlapping exposure.

Treating gold or debt as completely risk-free: Different asset classes have different risks. Diversification does not remove them.

Ignoring emergency savings: Money needed for medical expenses, household costs or unexpected events should not depend entirely on the stock market.

Investing without understanding the exit conditions: Before investing, understand the scheme's exit load, taxation, liquidity and other relevant terms.

Making frequent changes based on news: Economic developments matter, but constantly switching investments in response to headlines can increase costs and disrupt a well-designed plan.

Assuming that every market decline is a buying opportunity: Prices can fall further, and some businesses may face genuine long-term difficulties. Decisions should be based on research, valuation, risk and suitability rather than a falling price alone.

9. A Simple Portfolio Review Checklist

When markets become volatile, use the following checklist before making a major investment decision.

1. Review your goals: Are your target amount and timeline still realistic?

2. Check your emergency fund: Do you have sufficient accessible savings for unexpected expenses?

3. Review asset allocation: Is your portfolio too dependent on equities, a single sector or a particular market segment?

4. Examine fund overlap: Are multiple funds providing essentially the same exposure?

5. Check your risk capacity: Could you handle a significant decline without compromising essential expenses?

6. Review costs and taxes: Would selling or switching investments create exit loads, tax liabilities or other costs?

7. Rebalance when justified: If your portfolio has drifted materially from your intended allocation, consider whether rebalancing is appropriate.

8. Seek qualified guidance when needed: Complex decisions may require an assessment of your complete financial circumstances.

The purpose of a review is not to predict the next market movement. It is to check whether your investments continue to serve the purpose for which you selected them.

Final Thoughts: Build a Strategy, Not a Reaction

Market volatility is an unavoidable part of investing, particularly when your portfolio includes equity exposure.

Multicap funds can provide exposure to large-cap, mid-cap and small-cap companies through one scheme. Multi-asset allocation funds can spread investments across different asset classes. Both approaches can play a role in suitable portfolios, but neither guarantees better returns or protection from losses.

Thematic funds can also have a place in some portfolios, provided investors understand their concentration risks and avoid excessive exposure.

Ultimately, the most useful question is not which fund will perform best during the next market correction. It is whether your investments are appropriate for your financial goals, time horizon, risk tolerance and overall financial position.

At WealthCare Vest by Raghav Goel, we believe that informed investing begins with understanding your goals rather than chasing market trends.

Explore more educational articles at WealthCare Vest and continue learning about mutual fund portfolio diversification, investment basics and risk and return across asset classes.

Caring for your wealth, strengthening your investment.

Author: Raghav Goel, MBA (Marketing & Finance), Financial Planner, Founder – WealthCare Vest.

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Website: https://www.wealthcarevest.com/

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Disclaimer

This article is intended solely for educational and informational purposes. It does not constitute investment advice, a recommendation to buy, sell or hold any mutual fund or security, or an offer to provide investment advisory services.

Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing. The value of investments may rise or fall, and investors may lose part or all of their invested capital. Past performance is not indicative of future results.

Multicap and multi-asset allocation funds carry risks that vary according to their investment mandates, underlying holdings, asset allocation and prevailing market conditions. Diversification does not guarantee profits or prevent losses.

The examples and allocations in this article are hypothetical and are provided only to explain general investment concepts. They do not represent actual performance or a personalised recommendation. Tax treatment, exit loads and other investment conditions may change and should be verified before making a decision.

Investors should assess their financial goals, investment horizon, risk tolerance and financial circumstances before investing. Where appropriate, seek advice from a suitably qualified and authorised professional.

Mutual Fund Distributor: ARN-284331.

Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.