One Category Split Into Two, By Regulatory Necessity
Until September 2020, "Multi Cap Fund" was the standard category for diversified equity funds investing across market capitalisations without rigid allocation constraints. A SEBI circular that month changed that — and the industry's response created an entirely new category, Flexi-Cap Fund, specifically to preserve the flexibility Multi-Cap funds had previously enjoyed.
What SEBI's September 2020 Circular Actually Required
SEBI's circular mandated that Multi Cap Funds maintain a minimum 75% allocation to equity and equity-related instruments, with a specific sub-allocation requirement: minimum 25% each in large cap, mid cap, and small cap stocks. This was a significant tightening — prior to this circular, many funds labelled "multi-cap" were, in practice, heavily large-cap-weighted, with limited genuine mid and small cap exposure, and SEBI's intent was to ensure the category label actually delivered the diversified, genuinely multi-cap exposure investors expected from the name.
Why This Created an Industry Problem
Many existing "Multi Cap Fund" schemes, and the fund managers running them, had built their strategies around discretionary market-cap allocation — moving flexibly between large, mid, and small cap based on where the manager saw the best opportunities, without a fixed minimum requirement in each bucket. The new 25%-each rule would have forced a fundamental strategy change for these funds, effectively converting a flexible, manager-discretion-driven strategy into a constrained, rules-based allocation.
SEBI's Solution: A New Category, Not Just a New Rule
In November 2020, SEBI responded to industry feedback by creating the Flexi-Cap Fund category specifically — requiring only a minimum 65% allocation to equity and equity-related instruments, with no minimum allocation requirement across large, mid, or small cap at all. This gave fund managers who wanted to preserve genuine market-cap discretion a regulatory home to do so, while Multi-Cap Fund now specifically means the 25%-each-minimum, genuinely balanced category.
Side-by-Side: What Actually Distinguishes Them
| Feature | Multi-Cap Fund | Flexi-Cap Fund |
|---|---|---|
| Minimum equity allocation | 75% | 65% |
| Large cap minimum | 25% | No minimum |
| Mid cap minimum | 25% | No minimum |
| Small cap minimum | 25% | No minimum |
| Manager discretion on market-cap mix | Constrained | Full discretion |
Why Many Existing Schemes Simply Converted to Flexi-Cap
Given the choice, the large majority of AMCs running pre-2020 "Multi Cap Fund" schemes converted them into Flexi-Cap Funds rather than restructure to meet the new 25%-each requirement — since Flexi-Cap preserved the manager discretion their existing strategy and track record were built around. This is why Flexi-Cap Fund is, today, a considerably larger category by assets under management than genuine Multi-Cap Fund schemes, even though Multi-Cap was the original, longer-standing category name.
What This Means for an Investor Choosing Between the Two
- Choose Multi-Cap Fund if you specifically want guaranteed, regulation-enforced exposure across all three market-cap segments, regardless of the fund manager's current market view
- Choose Flexi-Cap Fund if you're comfortable trusting the fund manager's discretion to weight toward whichever market-cap segment they currently see the best opportunity in — including, potentially, being heavily concentrated in just one segment for extended periods if that's the manager's genuine conviction
Neither Category Is Inherently "Better" — They Serve Different Investor Preferences
A Flexi-Cap Fund's flexibility can be an advantage (a skilled manager avoiding an overvalued segment) or a risk (a manager's market-cap timing call proving wrong) — precisely the trade-off a Multi-Cap Fund's rules-based allocation is designed to remove entirely. Understanding which trade-off you're comfortable with matters more than assuming one category is objectively superior.
Advising on Category Selection for Diversified Equity Allocations
We help investors understand exactly what allocation discipline (or flexibility) they're actually getting when choosing between these two categories, rather than relying on the category name alone.
This article is for general informational purposes and does not constitute investment advice. Mutual fund investments are subject to market risks; please read all scheme-related documents carefully before investing.