The share of assets under management of multi-cap funds halved to ~10% as of January from ~20% the previous month even as that of flexi-cap funds, a category introduced just two months ago, printed at 8%.Intriguing as it sounds, the fall from grace for multi-cap funds owes itself to changes effected by the market regulator in the past few months to lend stability to investor portfolios. To recall, in September, SEBI had modified the definition of multi-cap funds and mandated market capitalisation requirement to make the schemes more diversified (see Annexure for details).

CRISIL’s press release at that time had highlighted that “the regulator’s move to make schemes true to their label could set the industry aflutter and result in merger, movement and new scheme launches.” It had suggested that most multi-cap funds, one of the largest equity mutual fund categories, would have to sell their large-cap investments to meet the new limits for small and mid-cap stocks. Furthermore, rebalancing of the scheme portfolio would mandate review of existing benchmark indices to reflect the new market cap requirement, considering most broad-market indices were skewed towards large cap stocks.

However later based on adequate representation by the industry body, the Association of Mutual Funds in India (AMFI), SEBI introduced Flexi Cap Fund category, under which, the open ended schemes need to allocate minimum 65% of their total assets in equity and equity related investments with no cap on investment in large-, medium- and small-caps. This is in line with definition of the erstwhile multi-cap category thus giving window for the industry to migrate the old funds in the new category without impacting the portfolio as well as investors.

And that is what most of the fund industry has done, using the flexibility to migrate most of the multi-cap funds to flexi-cap category. That said, even the flexi-cap category would likely remain skewed towards large-cap stocks despite the flexibility to move across categories, much like the multi-cap category.