With the introduction of the new flexi-cap category, now investors have six main categories based on market capitalisation of the underlying stocks from which they can choose a mutual fund scheme- flexi-cap, largecap, large-midcap, midcap, smallcap and multicap categories. The new flexi-cap category will invest at least 65 per cent of its portfolio in equities.
WHY THE NEW CATEGORY
The Sebi guidelines on flexi-caps come in the wake of market regulator's decision to regulate the multicap category for which it had in September announced that all multicap schemes will have to be necessarily diversified among largecap, midcap and smallcap stocks in the proportion of at least 25 per cent each.
As per Sebi's 2017 asset allocation norms, the multicap schemes had to invest 65 per cent of its total assets in equity and equity-related instruments. There was no other regulation by Sebi on market cap allocation across largecap, midcap and small cap stocks. However, post 2017, when the midcap and smallcap stocks took a beating, most multicap schemes ended up taking larger exposure in largecap stocks. In essence, they mirrored the returns of the largecap category.
To give true meaning to the multicap category, the Sebi has now regulated the stock allocation across large, mid and smallcap stocks. All multicap schemes are supposed to meet the Sebi regulation by January 2021. However, if the fund manager is unwilling to tweak the asset allocation as per the new multicap regulation, they may migrate the existing scheme to the flexi-cap category.
"The new category of mutual funds, namely 'flexicap funds', allows fund managers to invest in any stock which they think holds potential, without having to worry about market cap restrictions," says Rahul Jain, Head- Edelweiss Wealth Management.
WHAT SHOULD MULTICAP INVESTORS DO?
If you are invested in one of the multicap schemes, you should wait for some time to figure what your fund house decides in this regard. For example, Kotak Mutual Fund has announced that its Kotak Standard Multicap Fund, which is the largest multi cap fund, will be moved to flexi-cap category after taking requisite approvals and following the due process.
Once the transition is done there will be no change from an investor's perspective as the fund's objective, fund management strategy and its execution will remain largely unchanged compared to the past.
However, if your fund house decides to continue with its multi-cap scheme, you will have to take a call if you'd like to stick to the scheme in its current form or rather sell holdings and switch to a flexi-cap or any other desired scheme. If your idea behind multicap investment was to take exposure across the three market capitalisations in similar proportion, you don't need a flexicap scheme.
"Flexi-cap is a true-to-label equity fund category which, as the name suggests, will allow fund managers flexibility to invest across the spectrum of large, mid and small cap stocks," says Nilesh Shah, Group President & Managing Director, Kotak Mahindra Asset Management Company.
PPFAS Mutual Fund says its flagship Parag Parikh Long Term Equity Fund will also be shifting to the flexi cap category. "There will be no change to the fundamental characteristics, investment strategy and process for the scheme. The only change will be in the name of the scheme," says Neil Parag Parikh, Chairman and CEO, PPFAS Mutual Fund.
Jain of Edelweiss Wealth Management says given the guidelines, there is a possibility that these 'flexicap funds', could turn out to be opportunistic as funds may chase a particular market cap that is favourable on a particular day.
HOW WILL MULTICAP AND HYBRID FUNDS BE PLACED
Hybrid funds are those invested in equity and debt funds both. Among equities, they could invest in small, mid and largecap stocks. Compared to flexicap funds, however, the equity allocation could be lesser in hybrid funds. So far as multicap funds are concerned, they will have 75 per cent exposure in equities equally (25 per cent each) diversified among largecap, midcap and smallcap stocks.
"By and large flexicap funds are suitable for investors who want 'fill it, shut it, forget it' kind of experience. These are for investors who don't want themselves but the fund managers to make allocation among largecap, midcap and smallcap. Hybrid funds are suitable for investors who want partial equity exposure. For lumpsum investment, it is preferable to use hybrid funds rather than equity funds except when markets are cheap," says Shah of Kotak Mahindra AMC.
If unsure about which MF scheme will suit your needs, you may connect with a good mutual fund distributor for product suitability or go to a registered investment advisor for drawing an appropriate financial plan, Shah adds.