A sigh of relief for investors of multi-cap funds
Securities & Exchange Board of India (SEBI) has approved the introduction of Flexi-cap as a new category in mutual funds. This could prove to be a great relief for investors of multi-cap funds.
On September 11, 2020, SEBI had changed the norms for the multi-cap fund. As per the changed norms, a multi-cap fund, must at all times, have at least 25 per cent each in large-cap, mid-cap, and small-cap stocks. This developed quite a bit of anxiety among investors as the increased investments in mid-cap and small-cap would inherently increase the risk of multi-cap funds.
However, SEBI had changed the mandate for multi-cap funds in order to make it ‘true to its label’. Historically, most of the multi-cap funds acted similar to a large-cap or large and mid-cap fund with very low allocations to mid-cap and small-cap stocks. And, as multi-cap funds are free to move between market caps with no restrictions, they were perceived to be dynamically managing investments between large-cap, mid-cap, and small-cap stocks. However, that wasn’t the case with most of the multi-cap funds.
Post this change, many opinions were developed with respect to how the SEBI didn’t take the right decision. Being high in terms of assets under management (AUM), it is difficult for the fund house to deploy such a large amount into small-caps as very few opportunities are available in that space. However, this in no way means that one should avoid small-cap funds altogether. In fact, there were funds that had almost 90 per cent in large-cap and termed itself as a multi-cap fund.
Having said, from the existing investors’ perspective, the introduction of Flexi-cap came as a big relief as now, most of the multi-cap funds are likely to move into this category and the exiting investors would continue to invest in funds with the same risk as they were assuming before.
From a definition point of view, the flexi-cap fund is the fund that would have at all times, a minimum of 65 per cent of its assets invested in equity and related instruments without any restrictions on market-cap.
SEBI in an issued circular stated, “Mutual Funds have the option to convert an existing scheme into a Flexi Cap Fund subject to compliance with the requirement for change in fundamental attributes of the scheme in terms of Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996".