Market regulator SEBI provided some relief to the existing investors of multi-cap funds by announcing a new category – flexi-cap. As per the announcement, the definition of the new flexi-cap category makes it effectively similar to the original avatar of multi-cap funds.
Till a couple of months back, multi-Cap funds had just one rule to follow – invest at least 65 percent in equity instruments. There were no market-cap related restrictions. But SEBI changed this rule and mandated a split: to invest 25 percent each in large, mid and small-cap stocks.
New name, old mandate
Since the multi-cap category was an investor favourite and had acquired one of the largest AUMs in the industry (~ Rs 1.43 lakh crore), this change was met with strong opposition. Representations were made to the regulator to rethink the rule change. SEBI took feedback. However, instead of reviewing the multi-cap allocation rule, it decided to create a new category altogether, named Flexi-cap Funds. This new category follows a rule similar to what was applicable for multi-cap funds earlier – invest at least 65 percent in equity instruments.
As a result, many funds are expected to re-categorize themselves as flexi-cap schemes in order to retain their existing portfolios. This flexi-cap strategy will allow fund managers to invest wherever they feel opportunities are available, without market-cap restrictions.
But does it mean that all the existing multi-cap funds will become flexi-cap funds?
I think if not all, then most will make the move. And in particular, those funds that have large AUMs (more than a few thousand crores) will definitely be taking the flexi-cap route. And it won’t be wrong to say that even after the reclassification of multi-cap schemes as flexi-cap, most of the schemes will continue to be managed in the same manner as they were handled earlier.
Side note: At the time of writing, the largest multi-cap scheme – Kotak Standard Multicap (~ Rs 29,000-plus crore in AUM) – has announced that it will move to the new Flexi-Cap Category.
Many multi-cap funds were essentially being run as large-cap funds in disguise. Hence, for them, it wouldn’t have been easy to adhere to the new 25-25-25 rule. Even if they wanted to liquidate some large-cap positions, they would have found it very difficult to buy large quantities of small-cap stocks (to adhere to market-cap requirements) without price-impact. Hence, a large part of the AUM under multi-cap category is expected to migrate to flexi-caps very soon. The smaller multi-cap funds may still be able to make portfolio changes and continue to remain defined as multi-cap (under the new rules).
If most of the multi-cap AUM is bound to shift to the flexi-cap category, then will there be any funds left in the multi-cap category?
In the short term, the focus of AMCs will be to re-categorize their multi-caps to flexi-caps. Once that is achieved, I guess many fund houses will launch multi-cap NFOs to gather assets again. There is a business interest for AMCs to do so.
How multi-cap funds will look
Will the new Multi-cap funds be suitable for investors?
That depends on individual investors. SEBI did its bit to make multi-cap funds more true-to-label. So, if an investor wanted exposure to all market caps (with minimum investment in all) via just a single fund, then multi-cap funds under the 25-25-25 rule may be suitable. And just like large & mid cap schemes (35 percent each in large and mid-cap stocks) has its takers, even the new multi-cap schemes will also find their takers.
As for flexi-cap funds category, the only rule to adhere to is the minimum 65 percent in equity instruments. And that gives them the freedom to invest across market caps. So the fund manager has the flexibility to invest any proportion in stocks from large-caps, mid-caps and small-caps.
One thing to make note of is that many of these funds in their earlier Multi-cap avatar were being run as large-cap oriented funds. No doubt it’s the fund manager’s call, but at least now there is some indirect accountability as SEBI has highlighted (and announced in the public domain) that this was the primary reason it went ahead with the change in allocation rules for multi-cap funds.
If multi-cap funds were part of your mutual fund portfolio, then there isn’t much to do for you. Except that your multi cap scheme will change its name and its category soon.
(The writer is the founder of StableInvestor.com)