‘Flexi Cap Fund': A New Category Under Equity Schemes 

The statutory body SEBI has brought Flexi Cap Fund an as additional category under the equity schemes. Flexi Cap Fund is going to be characterized as schemes investing a minimum of 65% of its assets in equity and equity-related instruments with dynamic allocation across corporation, mid-cap, and little cap stocks.

This new category is expected to bring huge relief to the multi-cap fund managers. In September, SEBI had issued guidelines asking multi-cap funds to take a position a minimum of 75% of its total assets in equities, with a minimum of 25% exposure each in the corporation, mid-cap, and little cap stocks.

This was done to make sure that multi-cap funds hold a diversified portfolio across large, mid, and little cap companies, compliant to its label, and to differentiate it clearly from other scheme categories.

Most multi-cap funds hold an outsized cap biased portfolio with a big allocation to mid and little caps because the restriction on market cap allocation for multi-cap funds didn't exist earlier. Some fund managers carry negligible allocation to lower market caps or completely ignore the tiny cap segment, thus failing to satisfy the multi-cap mandate.

SEBI's guidelines on multi-cap funds meant that these funds would be required to extensively rebalance the portfolio to extend allocation in mid and little-cap stocks in line with the new norms. However, because of the lack of investment opportunities and liquidity constraints in smaller caps, many multi-cap funds were apprehensive about the change in the definition of those funds.

Following this, open-end fund houses through the AMFI had unrolled a proposal to SEBI for the creation of a replacement flex cap category. Notably, SEBI had given multi-cap funds the choice to merge their scheme with their large-cap scheme or convert their multi-cap scheme to a different scheme category, as an example large & mid cap account, thematic account, worth/contra account, etc.

To make sure market stability, SEBI had given open-end fund houses till January 31, 2020, to suits the circular through its preferred route.

With the help of this new scheme, such fund managers who are apprehensive about the reshuffling of the portfolio or getting merged with some other scheme may rebrand their scheme as the Flexi cap fund.

The category will allow the fund manager to take a position wherever value and opportunities are available with no restriction on market cap.

Fund houses can launch a scheme under this new category with immediate effect or convert an existing scheme (such as a multi-cap fund) into a Flexi cap fund subject.

What does it mean for investors?

For investors, this is a welcome move. Reduced allocation in large caps and enhanced exposure towards mid and little caps in multi-cap funds would have reduced the steadiness of the portfolio that these funds offered within the past.

It is expected that the majority of multi cap funds having a predominant allocation to large caps would rebrand themselves as Flexi cap fund. However, certain schemes with a significant allocation to mid and little caps may like better to continue with the multi-cap fund mandate.

Thus, investors now have the choice to pick a multi-cap fund that maintains a balanced allocation across market caps or a Flexi cap fund that invests dynamically across market caps, counting on their risk-taking ability.

SEBI has stated that for straightforward identification by investors and to bring uniformity in names of schemes for a specific category across mutual funds, the scheme name will need to be equivalent to the scheme category. The AMCs will need to make sure that an appropriate benchmark is adopted for the scheme in the Flexi cap category.

Kotak Standard Multicap Fund, the most important scheme within the multi-cap fund's category, has announced that it might shift to the Flexi cap category after taking requisite approvals and following due process of law. Nilesh Shah, Group President, and MD, Kotak Mahindra Asset Management Company has said that except the name of the fund (to be renamed as Kotak Standard Flexi cap Fund), everything else including the fund manager, investment process, and fund portfolio will remain an equivalent as before.

As an investor, keep a track of announcements by the multi-cap funds you've got invested in over the subsequent few months. Some changes in attributes might not match your initial investment objective and expectations that you simply had while investing within the scheme. But if the change is restricted only to the name of your scheme, while the portfolio allocation remains an equivalent, then there's not much to stress.

Who should consider investing during a Flexi cap fund?

Indian economy goes through a protracted slowdown and thus the expansion prospects of mid and small-sized companies are at the present very gloomy. Also, several companies under smaller caps are severed with corporate governance issues and concerns regarding business stability. Picking valuable investment opportunities in smaller caps may be a challenging task.

Therefore, within the near term, Flexi-cap funds are likely to carry a predominant exposure to large caps stocks. However, as and when the tide turns in favor of mid and little cap stocks, Flexi-cap funds may increase allocation within the segment.

Since smaller caps are susceptible to higher volatility which may increase the danger to the portfolio. That said, the presence of huge caps within the portfolio would offset a number of the volatility. This makes Flexi-cap funds suitable for investors having a moderate to high-risk appetite and an investment horizon of a minimum of 5 years.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Consulting & Governance shall not be responsible for any errors caused due to human error or otherwise.