Mutual Funds multi-cap SEBI categorisation

Multi-cap reclassification (2020)

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In September 2020, SEBI mandated that multi-cap mutual fund schemes hold at least 25% in each of large-cap, mid-cap, and small-cap segments, restructuring the multi-cap category that had previously allowed AMCs greater discretion in market-cap allocation. The mandate caused significant industry consternation, AMC scheme reshuffling, and the eventual creation of the Flexicap category (which gave back the discretion that multi-cap had lost).

For Indian retail investors holding multi-cap funds in 2020, the mandate represented a significant change in scheme behaviour: many “multi-cap” funds had historically been large-cap-heavy in practice, and the new mandate forced them to invest at least 25% in small-caps, which represented a much riskier portfolio profile.

Background

Pre-2020 multi-cap framework

Per the SEBI October 2017 categorisation :

  • Multi-cap definition: A scheme that “invests across large-cap, mid-cap, and small-cap stocks” with at least 65% equity.
  • No specific allocation requirement to each market-cap segment.
  • Practical behaviour: Most multi-cap funds held 70-80% large-caps, 15-25% mid-caps, 5-10% small-caps.

SEBI concern

SEBI observed:

  • Multi-cap category had drifted to be effectively “large-cap with some mid/small-cap”.
  • True multi-cap exposure wasn’t being delivered.
  • Investors believing they had multi-cap exposure were actually mostly in large-cap.

The September 2020 mandate

New 25-25-25-25 rule

SEBI mandated:

  • Minimum 25% in large-cap stocks.
  • Minimum 25% in mid-cap stocks.
  • Minimum 25% in small-cap stocks.
  • Remaining 25%: AMC discretion across the three buckets.

Effective date

Implementation by February 2021 (5-month compliance window).

Implementation requirement

AMCs had to:

  • Restructure portfolios to meet 25-25-25 minimums.
  • Disclose post-restructure portfolios in factsheets.
  • Inform investors of changes.

Industry response

Concerns raised

AMCs and industry bodies raised concerns:

  • Liquidity in small-cap segment: Small-cap market couldn’t easily absorb the mandated flows.
  • Performance impact: Heavy small-cap weighting would increase volatility.
  • Investor mismatch: Existing investors had been told these were multi-cap funds with discretionary allocation.
  • Alternative needed: Industry sought a “flexicap” category that retained allocation discretion.

AMFI representation

AMFI and industry leaders represented to SEBI:

  • Multi-cap mandate would disrupt large existing AUM.
  • Investor expectations had been set on the prior framework.
  • A new “flexicap” category should be created to give AMCs the prior discretion.

SEBI response: Flexicap category

In response to industry feedback, SEBI created the Flexicap category:

  • Flexicap definition: A scheme that invests across large-cap, mid-cap, and small-cap stocks WITHOUT minimum allocation requirements to each.
  • 65% minimum equity: Same as multi-cap.
  • Effective from late 2020 / early 2021.

Scheme migration

Most existing multi-cap funds:

  • Migrated to Flexicap category to retain prior discretion.
  • Continued the existing large-cap-heavy allocation.
  • Renamed schemes to “Flexicap” prefix.

Multi-cap category as restricted

The multi-cap category became:

  • A more constrained product per the 25-25-25 rule.
  • Slightly higher AUM by smaller AMCs that wanted to remain compliant.
  • Less popular than Flexicap.

Investor implications

For existing multi-cap holders

  • Scheme renamed to Flexicap (typically).
  • Continued operations with prior allocation.
  • No real change in actual exposure.

For new investors

Choice between:

  • Multi-cap: With strict 25-25-25 allocation.
  • Flexicap: With AMC discretion (like the old multi-cap).

Practical preference

Most investors and advisers preferred Flexicap because:

  • More flexibility for the fund manager.
  • Less forced exposure to riskier small-caps.
  • Better alignment with active-management philosophy.

Lasting impact

Categorisation framework

The episode demonstrated:

  • SEBI’s willingness to intervene in scheme categorisation.
  • Industry’s ability to negotiate via AMFI.
  • The importance of category definitions reflecting investor reality.

Investor education

The reform educated investors on:

  • The difference between “category name” and “actual portfolio”.
  • The importance of reading factsheets / SID carefully.
  • The risk-return trade-offs of small-cap exposure.

See also

External references

References

  1. SEBI circular on multi-cap reclassification (September 2020).
  2. SEBI subsequent Flexicap category circular.
  3. AMFI Best Practice Guidelines on category compliance.

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WebNotes Editorial Team

The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

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