Multi-material structure fabrication has the potential to address some critical challenges in today’s industrial paradigm. While conventional manufacturing processes cannot deliver multi-material structures in a single operation, additive manufacturing (AM) has come up as an appealing alternative. In particular, laser-directed energy deposition (L-DED) is preferred for multi-material AM. The most relevant applications envisioned for multi-material L-DED are alloy design, metal matrix composites (MMC), and functionally graded materials (FGM). Nonetheless, there are still some issues that need to be faced before multi-material L-DED is ready for industrial use. Driven by this need, in this literature review, the suitability of L-DED for multi-material component fabrication is first demonstrated. Then, the main defects associated with multi-material L-DED and current opportunities and challenges in the field are reported. In view of the industrial relevance of high-performance coatings as tools to mitigate wear, emphasis is placed on the development of MMCs and FGMs. The identified challenges include—but are not limited to—tightly controlling the composition of the multi-material powder mixture injected into the melt pool; understanding the influence of the thermal history of the process on microstructural aspects, including the interactions between constituents; and studying the in-service behaviours of MMCs and FGMs with regard to their durability and failure modes.