Securities and Exchange Board of India clarified on Sunday evening that mutual funds are free to choose the route for complying with the revised norms on multi-cap funds. On Friday, the capital markets regulator had directed multi-cap funds to invest at least 25% of their corpuses each in large-cap stocks, mid-caps and small-cap stocks, resulting in protests by the mutual fund industry.

On Sunday, Sebi said, “Apart from rebalancing their portfolio in the Multi Cap schemes, they could inter-alia facilitate switch to other schemes by unitholders, merge their Multi Cap scheme with their Large Cap scheme or convert their Multi Cap scheme to another scheme category, for instance Large cum Mid Cap scheme.”

The clarification paves the way for mutual funds to go ahead with their plans to look at options such as merger of multi-cap funds into large- and mid-cap schemes or conversion of the existing product into thematic schemes.

Multi-cap schemes have invested majority of the corpus in large-cap stocks. The mutual fund industry is not in favour of multi-cap schemes raising exposure to small-cap stocks on the grounds that the rush to buy them would be detrimental to unitholders of these schemes. Fund managers in these schemes have preferred blue-chips or larger mid-cap stocks of late because they are in a better position to weather the economic slump than smaller companies.