The SEBI circular on categorisation and rationalisation of mutual fund schemes had triggered off the recent rout witnessed in the small and midcap space, according to a report. Interestingly, \u00a0between January-June 2018, while the Nifty delivered positive returns, the Nifty MidCap 100 fell 14% and Nifty Small Cap 100 crashed by 21%. A report by Prabhudas Lilladher finds that prior to the crash, i.e, between September and January-18, small cap stocks witnessed a net inflow of Rs 5,650 crore by mutual funds. During the correction period, small cap stocks witnessed a net selling of about Rs 22 crore between January and June 2018 by mutual funds. \u201cAbout ~Rs 280 crore was sold in April 2018, while ~Rs 140 crore was sold even in June 2018. In the same period, ~Rs 21,900 crore worth of Large Cap stocks were bought, while Mid Caps stocks as per changed definition reported a net buying of ~Rs 14,500 crore,\u201d noted Prabhudas Lilladher.\u00a0Interestingly, despite strong inflows into small cap funds, the funds did not see any buying in the correction period. What led to this? Watch video:\u00a0Four tips for selecting tax-savings investments Earlier in October-17, SEBI had issued a circular mandating re-categorisation and rationalisation of mutual fund schemes, that were implemented between January and June-18.\u00a0 The circular had sought to create uniformity in the mutual fund industry by setting clear definitions of large-cap, mid-cap and small-cap stocks, creating specific categories of mutual fund schemes, where only one scheme is allowed per category. As per Value Research, roughly 30 equity schemes changed their categorisation post SEBI\u2019s classification. The new mandate led to a major sector rotation and an unprecedented portfolio overhaul in the mutual fund industry. \u201cMajor Capitalisation Rotation was seen in the (new) Large & Midcap Category , Midcaps (shunned smaller caps as forced to identify Midcaps) and Focus Funds (limited to 30 stocks and they ended up with preference to largecaps) \u2013 impacting roughly 35% AUM of Equity Mutual Funds, totaling Rs 5.47 lakh crore. Each of these seems directly correlated to the SEBI circular \u2013 especially for the Small cap exodus which is common across the board! \u201d noted the report. Summarising its findings from the study, Prabhudas Lilladher said that its analysis indicates that small caps bore the brunt almost entirely due to the SEBI circular on mutual fund reclassifications while for Midcaps, the subsequent changes to Nifty Midcap Index apart from the SEBI circular caused a vast rotation between stocks. \u201cThe selling pressure may have spread across other unimpacted categories as well as counter specific sales exacerbated the negative sentiment,\u201d said the report.