The New Flexi Cap Category in Mutual Funds by SEBI

Diwali is around the corner, and spendings are at a peak at this time of the year. Now, let us imagine if the money given by elders to kids during the festive season is monitored by their mothers, and she sets a particular rule for spending. Being an obedient kid, you oblige to what she says. You have been used to these rules for years, but what if suddenly she changes the rules and sets a restricted limit on spending? Wouldn't it make you unhappy?

Did you know that a few months ago, even the investors in the Indian market had to face a similar issue? Check here to know more: SEBI’s new multi-cap fund rule.

The Securities and Exchange Board of India (SEBI) has been attempting to rationalize and categorize mutual fund schemes since 2017, to make it simpler for investors to pick the correct plans (allude SEBI circular number SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017).

In an ongoing declaration, SEBI has presented another class under equity mutual fund schemes called Flexi-Cap Mutual Funds. This has been communicated via SEBI circular number SEBI/HO/IMD/DF3/CIR/P/2020/228 dated November 06, 2020. This declaration has gone ahead with the recommendations of the proposals of the Mutual Fund Advisory Committee (MFAC) following the rationalization of multi-cap reserves.

What are Flexi-cap Mutual Funds?

A Flexi-cap fund is a kind of mutual fund that isn't limited to investing in organizations with a predetermined market capitalization. This sort of fund structure will be demonstrated in the fund's prospectus. A Flexi-cap fund can give the fund supervisor more noteworthy investment choices and expand possibilities.

As per SEBI's notice, a Flexi-Cap Mutual Fund is an open-ended, dynamic equity scheme that invests across different market capitalizations (large caps, mid-caps, and small caps). The base investment in equity and equity-related instruments should be 65% of the total assets of the scheme. The Asset Management Company (AMC) has the freedom to pick an appropriate benchmark for each Flexi-Cap scheme.

Further, SEBI has permitted fund houses to change the current scheme into a Flexi-Cap scheme, subject to consistency with the necessity for change in fundamental attributes of the scheme, as far as the Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996.

Why was this category needed?

Before September 2020, multi-cap funds had the freedom to put resources into organizations with fluctuating market capitalizations with no limitations. In other words, fund supervisors of multi-cap funds demanded to contribute 65% of the net assets of the scheme in equity and equity-related protections, with no base introduction needed towards any market cap.

In September 2020, SEBI gave a circular making it required for multi-cap funds to contribute at least 75% of their total assets in equity and equity-related securities with at least 25% exposure to equity and equity-related securities of every large-cap, mid-cap, and small-cap organizations.

While this was done since most multi-cap funds had transformed into large-cap-centered funds, it additionally raised worries among investors and fund managers hoping to improve returns by making a portfolio with a well-researched blend of stocks across market capitalizations.

Being open-ended and completely managed funds, the fund managers were limited to 25% portfolio exposure in one market cap, regardless of whether the financial conditions recommended something else. Thus, on the proposal of MFAC, SEBI chose to dispatch another classification that permits fund managers to make a portfolio that works well with the markets and helps them to produce good returns.

This brings the fund managers back into the game since the accomplishment of the scheme will rely on the aptitude of the fund supervisor in picking the correct market cap and stocks to put resources into.

Why did SEBI Set Limits?

Most multi-cap funds were hefty on large caps in their portfolios. The market controller saw such holdings as not being consistent.

"Above all else, the type of scheme should be according to the name, and afterward, the benchmark ought to be distinguished. We are not driving anybody to put resources into those caps. Investments should be done to the greatest advantage of investors," SEBI administrator Ajay Tyagi said at the 25th yearly regular gathering of AMFI, held a month ago.

What should investors do?

Most investors who have been investing in mutual funds for years, associate multi-cap funds with funds where experts look for picks for allocation between market caps.

With the rationalization of multi-cap funds and the display of Flexi-cap funds, speculators should be certain about the kind of plan they are investing in before signing the pecked line. If they need a decent exposure to equity and Equity-related instruments of organizations across market capitalizations, at that point, multi-cap assets can be thought of.

Then again, if they trust in the Fund manager's abilities and need to use equity investment chances to acquire the most extreme returns, at that point, the recently launched Flexi-cap assets can be thought of.

With the SEBI attempting to make investments less difficult and better coordinated for investors, they must remain educated regarding these changes, invest as indicated by their risk resistance and financial targets, and read the offer documents cautiously before investing.

Conclusion

Just like the kid with the festive money and his mother's rule on spending, you would also be confused with the limit set by the SEBI; but what if your plans were already similar to the new set of rules? You would not face many obstacles.

The new move seems to be an excellent choice by SEBI in light of a legitimate concern for investors who need total flexibility in ownership for companies across market cap buckets. Investors would depend more on the fund manager's abilities and choices to choose market cap inclination. This, likewise, would offer flexibility to managers to make investment decisions and premise their opinion of organizations, regardless of their market caps.

Since this is another classification that is getting made, most multi-cap funds may get their scheme renamed into Flexi cap classification. Further, the multi-cap class is an extra option accessible to managers as a product choice, which will be overseen according to market cap roofs endorsed by SEBI.