The Securities and Exchange Board of India (SEBI) on expected lined has brought about the creation of ‘Flexi cap’ mutual funds as a category under equity mutual funds.
This has been warranted because in September 2020, SEBI had changed the mandate of multicap mutual funds.
Earlier multicap mutual funds had no restriction with regards to sector allocation and cap as long as 65% of the overall portfolio had been invested into equities.
After the change in mandate by SEBI, multicap mutual funds now needed to invest 25% each into large cap, mid cap and small cap stocks.
What is Flexi cap mutual funds?
- A flexi cap mutual fund is a mutual fund that would by mandate need to invest a minimum of 65% into equity at all times.
- The remaining 35% can either be invested in debt, international equity, cash or any of the above caps or all.
- This 65% is needed for any equity fund and not just multi cap mutual funds to qualify as equity funds which has a favourable tax proposition.
- This 65% is only minimum which can even go up to 100% in case the fund manager so desires.
Whatever the allocation between 65% to 100%, there is no restriction with relation to large cap, mid cap or small cap stocks.
Basically, the fund would be run as how erstwhile multicap mutual funds were while being renamed as flexi cap mutual fund rather than a multicap mutual fund scheme.
The fund attributes remain the same, the only change is the name.
What is a multicap mutual fund?
A multicap mutual fund is a mutual fund that would by mandate need to invest a minimum of:
- 25% in large cap stocks
- 25% in mid cap stocks
- 25% in small cap stocks
The remaining 25% can either be invested in debt, international equity, cash or any of the above caps or all.
In order to qualify as a flexi cap mutual fund, a mutual fund needs to invest a minimum of 75% in domestic equity divided as described above.
Why the need for flexi cap mutual funds?
The Securities and Exchange Board of India (SEBI) had on 11/09/2020 issued a circular bringing about changes to fundamental characteristics of Multicap mutual funds.
The regulator believed that most multicap mutual fund schemes were basically large cap schemes in terms of their asset allocation disguised as multi cap funds.
These multicap mutual fund schemes were therefore not true to their label.
There is an element of truth but existence of truth does not imply a lie part as well, the universe is not as binary as we believe so.
In order that investors know exactly how their fund is going to be positioned with respect to caps, a new category in flexi cap mutual fund has been created.
In order to give more flexibility to the mutual funds and taking into account the recommendations of Mutual Fund Advisory Committee (MFAC), a new category named 'Flexi Cap Fund' under equity schemes will be available said SEBI in a circular.
What can mutual fund houses do?
Most mutual fund houses had already raised concern of the necessary investments in mid and small cap stocks.
With mandatory 25% investment into mid and small cap stocks (50 % overall) the new multicap fund structure would have become even more aggressive than a large & mid cap mutual fund scheme.
Mid and small cap stocks are more illiquid than large cap stocks and this would have created the risk of an unnecessary bubble.
Mutual fund houses have the option of converting an existing multicap mutual fund scheme into a flexi cap mutual fund.
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 said SEBI in a circular
They would also need a suitable benchmark for the new scheme.
Additional reading: Click Here to read more about what are Dividend yield mutual funds
Kotak mutual fund has already declared that they would be converting the kotak standard multicap fund into a flexi cap mutual fund.
Most mutual fund houses are expected to follow in the footsteps of kotak standard multicap fund and convert their multicap schemes to flexi cap mutual funds.
What should you do if you are presently invested in a multicap fund?
If you are presently invested in a multicap mutual fund then you need to first note what direction your multicap fund is going to take.
It would either stick with being a multicap fund or be converted to a flexi cap mutual fund.
You would need to decide if you want to invest in a flexi cap mutual fund (in new mandate) or multicap mutual fund (in old mandate).
In case your current multicap mutual fund decides to convert itself into a flexi cap mutual fund, it would provide you a period of 1 month within which you can redeem your investments without attracting any exit load.
You would need the consider the following points, no matter your decision:
- Your tax structure, if any.
- Your overall portfolio structure.
- Your risk appetite
- Your goals and
- Your time horizon among other things.
