The Securities and Exchange Board of India (Sebi) on Sunday sought to allay the concerns of fund managers of multi-cap mutual funds after it tightened the investment rules for the category on Friday.

Sebi had said multi-cap funds must have a minimum corpus of 75 per cent invested in equities against the present requirement of 65 per cent. Moreover, to diversify their investments, it ruled that these funds will have to make a minimum investment of 25 per cent each in equity and equity related instruments of large cap, midcap and smallcap companies. Sebi gave fund houses time till January 2021 to meet this requirement.

The move created a flutter in the domestic mutual fund industry as fund houses began examining options to dodge compulsory purchases of small and midcap stocks.

In a clarification on Sunday, Sebi said multi-cap schemes had flexibility in terms of allocation to large, mid and small cap stocks, based on the preference of their unit holders. Apart from rebalancing their portfolio, they can facilitate a switch to other schemes by unit holders, merge their multi-cap schemes with the large cap ones or convert their multi-cap schemes to another category, for instance a “large-cum-mid cap scheme” to be “true to label”.

The market regulator said it will examine the proposals of the industry, if any, received in this regard.

Experts had welcomed Friday’s move, pointing out that it will correct the investment structure of multi-cap funds which are tilted heavily in favour of large cap stocks. However, fund managers expressed concern that the poor liquidity in small and midcap stocks will sharply increase the risk for investors investing in these schemes.

The clarification from Sebi could temper the optimism of a rally in small and midcap stocks.

Dhiraj Sachdev, managing partner and chief investment officer at Roha Asset Managers, told The Telegraph, “This rectification has to be welcomed. Over the last two to three years, we have seen polarisation towards large caps and this will now get corrected.”