Everything to know about New Flexi Cap category in Mutual Funds

What is Flexicap Category? How it is different from Multicap Category?

Introduction

In September’20, Securities Exchange Board of India (SEBI) came up with a new rule for Multicap funds to invest at least 25% of the total Assets Under Management in large, mid and small cap companies. This led to many speculations about demand for small caps and mid caps increasing. Association of Mutual Funds in India (AMFI), requested SEBI to create a new category called Flexicap which will not have to adhere to these regulations. On 6^th November’20, SEBI came approved the request of new Flexicap category. Let us discuss about this new category in detail in this blog.

Details of Flexicap Category

What is Flexicap category?

• Under Flexi Cap category, fund managers have the freedom to allocate the total corpus in any category.
• Under this scheme, the fund manager can allocate money to companies irrespective of their market capitalization. But this scheme has one restriction that 65% of the corpus has to be allocated in equity and related instruments.
• Fund houses will have to re-brand their schemes under new Flexicap category before 31^st January’20.

What is the difference between Multicap and Flexicap category?

• Primarily, Multicap category was similar to Flexicap category, but SEBI changed this rule and mandated the fund managers to allocate at-least 25 % in large ,mid and small cap stocks.
• Thus, the current Flexicap category is same as Multicap category prior to change in SEBI’s regulations.

Why was it important to introduce Flexicap category?

• Many analysts believed that the introduction of Flexicap category was to compensate the 25-25-25 rule implemented in the original multi-cap category.
• This is because the multi cap category considered Nifty 500 as its benchmark, in which first 100 companies were large cap, next 150 companies were mid-cap and next 250 companies were small cap.
• However, the weightage of large cap market capitalization wise was above 70% in Nifty 500. This would make it difficult for multicap funds to outperform the index as they are allowed only 25% allocation to large cap stocks.
• Flexicap category would give discretion to the fund manager to allocate as per his/her conviction.
• Asset under management in multi cap funds was above INR 1.4 lakh crore as on 30^th October’20, with majority of corpus in large cap stocks. It would be difficult for fund managers to shift their corpus to small and mid caps without huge price fluctuations and illiquidity issues.

What will be the impact on retail investors?

• Retail investors can now breathe a sigh of relief as the new category will ensure portfolio stability in returns and will give them flexibility indirectly owning businesses across large, small and mid cap categories.
• New allocation scheme would entailing forced allocation to small and mid caps would have impacted the returns.