Multi-cap mutual fund investors can relax, as SEBI introduces a new flexi-cap category

The Securities and Exchange Board of India (SEBI) on Friday introduced a new category of mutual funds – ‘flexicap.’ The move would allow fund managers to shuffle their allocations freely across small, mid and large-cap stocks, without any minimum limits.

The move addresses the concerns that many fund houses and investors had on how multi-cap funds will be managed following SEBI’s September circular.

Restriction lifted

PPFAS Mutual Fund (MF), which runs with just three schemes, had categorised its flagship long-term equity fund as multi-cap. The fund takes exposure to international equities.

However, the new limits set by SEBI last month restricted the fund’s investment universe.

Neil Parikh, chief executive officer of PPFAS MF, welcomed the latest move by SEBI.

“The earlier circular was very restrictive. The idea behind having one scheme for us was that it could go anywhere, across sectors, market caps, even across geographies, wherever the fund manager saw opportunities. Thanks to this move, we will now be able to run the fund with the same strategy, except for changing the name,” he says.

Multi-cap funds had become a popular category among investors over the years. The asset size for the category was at Rs 1.43 trillion (as of September 30, 2020).

This size is just behind that of large-cap funds (Rs 1.45 trillion), which is the largest equity category.

Nilesh Shah, managing director of Kotak MF, and chairman of AMFI, indicated that Kotak MF’s multi-cap fund will be re-positioned as a flexicap scheme.

“Kotak Standard Multicap Fund, which is the largest multi-cap fund … will move to the flexicap category after taking requisite approvals and following the due process.”

“Except the name of the fund, which will now be Kotak Standard Flexi Cap Fund, everything else viz. fund manager, investment process and fund portfolio will remain the same as before,” he adds.

What was the bone of contention?

AMFI had approached SEBI with the idea of a new flexicap category right after its circular was issued, so that there were no major disruptions in the way the fund houses had been managing multi-cap funds.

In September, SEBI had called for an overhaul of multi-cap funds, with the aim of making them true-to-label. It stated that such funds must have a minimum 25 percent investment in each of small, mid and large-cap stocks.

Most of these multi-cap funds had heavy bias towards large-cap stocks. The move could have led to a sell-off in large-caps, and significantly high buying of mid and small-cap stocks.

Back-of-the-envelope calculations had suggested that fund managers would have had to sell roughly Rs 36,714 crore worth of large-caps and distribute the same to mid and small-cap stocks.

Why did SEBI set limits for multi-caps?

Most multi-cap funds were heavy on large-caps in their portfolios. The market regulator viewed such holdings as not being true-to-label.

“First of all, the form of the scheme should be as per the name and then the benchmark should be identified. We are not forcing anyone to invest in those caps. Investments should be done in the best interests of investors,” SEBI chairman Ajay Tyagi said at the 25th annual general meeting of AMFI, held last month.

What does it mean for investors?

If you have an investment in a multi-cap fund, nothing much changes for you, except that your scheme will be re-positioned and its name will be changed.

However, you will get a 30-day exit window (without any exit-load), as required by regulations, for a ‘fundamental attribute change.’

However, you can decide to stick to the fund, if you still want your money to be allocated as it was being done in the earlier (freer) version of multi-cap funds.

“If the investors’ thought process is that they want to stay in funds that invest across market caps, depending on the fund managers’ view of the market cycle, then they should stay put,” said Kirtan Shah, chief financial planner at SRE.