The buying of stocks by the fund houses/ fund managers is governed by the instructions as per the mandate of the scheme. For example, if the mandate of the scheme mentions buying large cap funds, then the fund managers do as per the mandate. Flexibility is also exercised but within the regulations.
Also, every scheme lays down the proportionate share of large cap, mid cap, small cap etc. holdings in the scheme portfolio. Fund managers take due care of the percentage as well. For example, a particular scheme has 70% large cap investment, 20% mid & small cap, and remaining 10% as cash holdings.
The fund managers continuously monitor the performance of the stocks and make necessary changes (within regulations) whenever required.
Also, selection of stocks depends on the company’s policy. Some companies prefer growth stocks while some prefer sector based stocks.