Flexi Cap option provides escape route to Multi Cap schemes from enhancing small-cap exposure

The September 11 circular of market regulator Securities and Exchange Board of India (SEBI) – mandating Multi Cap Funds to allocate at least 25 per cent of their portfolios in large-, mid- and small-caps each by February 2021 – has raised concerns among the stakeholders in the Mutual Fund (MF) Industry.

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This is because currently, Multi Cap funds of most Asset Management Companies (AMCs) have majority of asset allocation in large-caps, moderate allocation in mid-caps and negligible allocation in high-risk small-caps.

The major concern is that the small-cap space doesn’t have scope to allocate 25 per cent of Multi Cap assets of all the AMCs and forced investments in worthless companies may put the investors’ money in even greater risk.

Moreover, picking small-cap stocks requires thorough study of the targetted company, industry, etc and also requires great investment skill, which very few fund managers have. So, forcing the fund managers of all the Multi Cap funds would enhance the risk profile of this category.

Realising the constraints, the SEBI had issued another circular, explaining that, apart from rebalancing their portfolios, AMCs may facilitate the existing unitholders to switch from Multi Cap schemes to schemes of other categories and/or merge the schemes under Multi Cap category with the schemes under other categories like Large Cap or Large cum Mid Cap categories.

Multi Cap Funds: SEBI provides options after leaving MF players confused

To facilitate maintaining flexibility of such funds to invest in stocks across large-, medium- and small-caps without fixed allocation, the Association of Mutual Funds in India (AMFI) had requested the market regulator to introduce Flexi Cap category, in which the schemes of Multi Cap schemes may be shifted.

Accordingly, the SEBI has announced the introduction of the Flexi Cap Fund category, under which, the open ended schemes need to allocate minimum 65 per cent of their total assets in the stocks across large-, medium- and small-caps.

Akhil Chaturvedi, Associate Director & Head of Sales, Motilal Oswal Asset Management Company, feels that most Multi Cap funds would grab the opportunity and may get their schemes reclassified into Flexi Cap category.

However, Ajay Sharma, Director & Designated Partner at InvestmentMitra Advisors LLP, thinks that introduction of more categories won’t help the investors much.

“While we should practice ‘less is more’, with mutual fund schemes it is happening otherwise. An investor needs to invest in a portfolio of 4-5 schemes. But he has to first pick those 3-5 categories out of dozen odd categories and then within that category has to find schemes that meet his criteria,” said Sharma.

“Categories like ‘Large & Mid Cap & Multi Cap’ with defined allocation should be removed and it should be left to an investor to balance his investments among market cap in chosen proportion,” he said.

“It only gives AMCs an opportunity to launch a new scheme without adding much value,” Sharma further said.

Giving his opinion on the role of Flexi Cap in providing an escape route to Multi Cap schemes, Sharma said, “Yes, for sure many AMCs who have large cap heavy portfolios will take advantage of this provision and change their mandate from Multi Cap to Flexi Cap. In a way this will also save markets from undue churning of portfolios.”