Mutual funds: Know all about the new flexi-cap category

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November 16, 2020 12:15 AM

The new category will bring stability to retail investors’ portfolio as multi-cap funds can now be just rebranded as flexi-cap funds

Analysts say the flexi-cap category will help fund managers to invest freely across market capitalisation.Analysts say the flexi-cap category will help fund managers to invest freely across market capitalisation.

The market regulator has introduced a new category of equity mutual fund scheme called ‘flexi-cap fund’. It will be an open-ended dynamic equity scheme investing across large-cap, mid-cap and small-cap stocks. The minimum investment in equity and equity-related instruments will be 65% of total assets. Asset management companies (AMCs) will have the option to convert an existing scheme into a flexi-cap fund.

The introduction of flexi-cap fund by Securities and Exchange Board of India (Sebi’s) comes as a big relief to fund managers of multi-cap funds as the regulator’s September 11 directive prescribed a minimum 25% allocation to large-, mid- and small-cap stocks each. This was done to make multi-cap schemes more diversified and fund houses will have to align their portfolios to these new limits by January 31, 2021. Multi-cap funds had average assets under management of Rs 1.45 lakh crore as of October.

A large part of multi-cap funds are invested in large-cap stocks as there was no limit on market cap allocation. A research note from Crisil says most multi-cap funds will have to sell off their large-cap investments to meet the new investment limits for mid- and small-cap stocks. This could have resulted in Rs 41,000 crore of net outflows from large caps and net inflows of Rs 13,000 crore and Rs 28,000 crore in mid-cap and small-cap segments, respectively. “Finding that order of investments in lower caps could be an uphill task for fund managers, especially given the illiquidity in the segment and the downbeat economic forecasts amid the Covid-19 pandemic,” the note says.

What flexi-cap means?
AMCs through Association of Mutual Funds in India had urged Sebi to create a new flexi-cap category. There were apprehensions whether the regulator would oblige as there is already a focused fund category that allows flexible investments, albeit for a concentrated portfolio.

So, with the introduction of the flexi-cap scheme, fund managers who either had to reshuffle the multi-cap portfolio or merge with other schemes can now just rebrand their scheme as a flexi-cap fund. Investors will only see a change in the fund category. Analysts say the flexi-cap category will help fund managers to invest freely across market capitalisation.

Fund houses can launch a scheme under this new category with immediate effect or convert an existing scheme into a flexi-cap fund subject to compliance with Sebi norms for change in fundamental attributes of the scheme.

Relief for investors
For retail investors, the new category will help to bring in stability to the portfolio as any forced reduction in allocation to large-caps and increasing allocation to mid-and small-caps in multi cap funds would have had an impact on the returns. Analysts say flexi-cap funds will be good for those investors who want complete flexibility in ownership of companies across market cap buckets.

With introduction of flexi-cap category investors the tax implications of switching has also been taken care of. Switching from multi-cap to another scheme would have had tax implications especially for investors with less than one-year holding period. Further, even for investors with a long-term investment horizon, capital gains of more than Rs 1 lakh per year is subject to long-term capital gains tax.

The Sebis circular says AMCs will have to ensure that a suitable benchmark is adopted for the flexi-cap fund. For easy identification and to bring uniformity in names of schemes for a particular category across mutual funds, the scheme name will be the same as the scheme category.

Investors must keep track of the changes by fund houses in multi-cap funds till January 31 next. If the changes are just limited to the scheme name, then one can stick to the fund as the fund managers will have a large exposure to large-caps stocks initially. Later, when the economy revives, fund managers may increase allocation to mid and small-cap stocks.

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