A familiar drift

Summary: SEBI created the flexi-cap category in 2020 to solve a problem with multi-cap funds. Six years later, the average flexi-cap fund looks almost identical to the problem it replaced. The category changed. The behaviour didn't.

We have been here before. The flexi-cap category that our analysts now find sitting comfortably in large caps was itself created six years ago, as the regulator’s answer to nearly the same complaint.

The episode explains why this was always likely and why it will happen again.

In 2020, SEBI examined multi-cap funds and concluded they were not living up to their description. These were sold as go-anywhere products, free to move across large, mid and small companies. Most had settled into large caps and stayed there. In the regulator’s own words, they were not true to the label. The response was the obvious regulatory one: a rule requiring every multi-cap fund to hold at least 25 per cent in each of large, mid and small caps. The diversification investors thought they were buying would actually be there now.

The industry objected, lobbied and was offered a way out that, in hindsight, is revealing. Instead of holding the line, SEBI created a new category altogether. The flexi cap restored the old unconstrained freedom. Most multi-cap funds took the offer, changed their names, and carried on as before. For many schemes, the only real change was the name on the fact sheet.

Today’s average flexi-cap fund keeps around three-fifths of its money in large caps. That figure has moved very little over six years, which included a crash, a recovery and more than one bull market. The freedom handed back in 2020 has, for most funds, gone unused. The tendency the new category was meant to leave behind has reasserted itself within it.

This is the real reason the story deserves your time. It is not a story about flexi caps. It points to a steady pull within active management that neither a fresh label nor a written rule has managed to counter.

The size of the money a manager runs, the career risk of straying from the benchmark, the comfort of holding familiar liquid names: all of these draw managers back to large companies and to the flavour of the day. I have seen this in every multi-cap and multi-asset category over three decades, from the old MIPs and balanced funds to these latest ones.

You can rename a category. You can prescribe its allocations. You cannot force fund managers to have conviction.

A warning here. Regular readers know my usual position. In most months, the sensible response to analysis in these pages is to read it, take the point, and leave your portfolio entirely alone. The impulse to act on every new finding has harmed more investors than any market fall. That advice still stands.

But there is a difference between restless churning and keeping track of what you actually own, and this is one of those rarer occasions. Hopping between funds in pursuit of last year’s best performer is the behaviour I warn against. Noticing that a fund you bought for its flexibility has gradually become a large-cap fund in all but name is something quite different. The holding is no longer the one you chose.

So read ‘Mutual Fund Insight’s - July 2026 edition’ cover story for what to examine and which alternatives might suit you. Read this for the reason it matters. On this occasion, the disciplined course is to act, not wait. Do it carefully, by directing fresh money towards a better-suited fund rather than overturning everything at once. Standing still and staying the course are usually the same thing. They are not always so.

Also read: The flexi-cap tax you didn’t know you were paying