The same shelf, opposite small cap mandates

A cousin forwarded me two funds last week and asked which one to buy.

Both were sitting under the same tab on his app. Diversified equity. Go anywhere. He was about to pick whichever one had the bigger return on the screen, which is what most people do.

I asked him one thing first. Did he know that one of those funds is required, by rule, to keep a quarter of his money in small caps every single day it exists, crash or no crash. And that the other one, on the same shelf, is free to hold none.

He did not. Most people do not.

Here is the part nobody reads. A multicap fund is boxed in by SEBI. At least 25 percent in large caps, 25 in mid, 25 in small. Three quarters of the book locked into a fixed shape. A flexicap has exactly one constraint. Keep 65 percent in stocks. After that the manager roams wherever he likes, and the floor under small caps is zero.

Now the detail that gives the whole thing away. Flexicap did not always exist. SEBI wrote the 25 in small caps rule in September 2020. Eight weeks later it opened the flexicap category, and most of the big fund houses converted their multicaps into flexicaps almost immediately. The thing they were escaping was that forced small cap sleeve.

So when a fund is labelled diversified, that word is doing almost no work. One version has to sit through every small cap drawdown with a quarter of your money. The other can dodge it, or double down, depending on one human's read of the market. Neither is automatically safer. But they are not the same fund, and the shelf will never tell you which one you are holding.

Read the mandate, not the tab.

See both, side by side: