All you need to know about the new Mutual Fund Category: Flexi Cap Funds

On Saturday, i.e. 7th November 2020; the mutual fund regulator Sebi came out with a circular introducing a new mutual fund category: Flexi Cap Funds. Back in September when Sebi had brought some changes to Multi cap funds, we had told investors to stay put with their investments until further clarity. And with Saturday’s new circular, it is clear that Sebi took into consideration the mutual funds’ concerns. So what does the new Flexi Cap Funds Category mean for investors? What are the potential implications of this and what should investors do? Invest in mutual funds with the same way or go with Flexi Cap Funds? Here’s all you need to know.

Flexi Cap Funds – an Introduction

As mentioned in Sebi’s circular :

In order to give more flexibility to the mutual funds and taking into account the recommendations of the Mutual Fund Advisory Committee (MFAC), a new category named “Flexi Cap Fund” under Equity Schemes will be available with the following scheme characteristics:

An open ended dynamic equity scheme investing across large cap, mid cap, small cap stocks with minimum investment in Equity instruments up to 65%.

This simply means that the Flexi Cap funds will able to invest in stocks across market capitalization without any restrictions. This is how Multi Cap funds were operating till now. Additionally, in order to bring uniformity across funds and for easy identification the scheme name must be similar to the scheme category. For example, if ABC mutual fund has a Flexi Cap fund, it’s name should be ABC Flexi Cap fund.

So why Flexi Cap Funds are introduced now?

As we mentioned earlier, in September 2020; Sebi changed the investment mandate of multi cap funds where they had to invest 25% each in Large, Mid, and Small cap stocks. This investment mandate was very restrictive for fund managers; as in multi cap funds fund managers had a free hand to invest in any stocks of any market capitalization.

Collectively Multi Cap funds manage assets worth 1.46 Lakhs Crores. Now, if they had to rebalance their portfolio to accommodate the new rule of 25% in each market cap stocks, it would have impacted the fund performance and eventually would have hurt the investors’ interests. Hence, as a way out, Se bi introduced a new category called Flexi Cap.

Will all Multi Cap Funds will now become Flexi Cap Funds?

Not necessarily. The decision of changing the category from Multi cap to Flexi Cap lies with the fund houses. As of now, two funds viz. Parag Parikh Long Term Equity Fund and Kotak Standard Multi Cap Funds have mentioned that they will change their category from Multi Cap to Flexi Cap. And hence, they will also have to change the name of the fund too.

Other AMCs will also come out with their decisions in due course and give clarity on whether they will change the category or will continue with Multi-Cap Funds. Hence, as an investor, you can wait for communication from the respective fund houses on this before taking any action.

Which Fund should you choose now? Multi Cap or Flexi Cap?

The only major difference between the Multi Cap and Flexi cap fund is their investment mandate. Multi cap funds have defined mandate whereas Flexi Cap fund doesn’t. So Flexi Cap fund is a better option as the funds have a long track record as earlier multi cap funds. Also, the flexible investment mandate allows fund managers to invest according to their strengths. This investment style can beat the benchmark returns over longer periods.

The new Multi cap category will be investing as per the new mandate for which we haven’t seen any past performance. Hence, we will have to wait till we see how the funds actually implement this strategy and whether it works well or not. We will reserve our views on the new Multi Cap categories till then. If you want our review on any of the multi cap funds that you are holding, feel free to reach out to our support team to get a detailed analysis from our research team.