In Sep-2020, SEBI has changed the rules for multicap mutual fund asset allocation that created confusion for investors. SEBI has now introduced another category of funds, i.e. Flexi-cap mutual funds. Flexi-cap mutual funds would invest at least 65% in equity segment and the balance in debt and other instruments. What are flexi-cap mutual funds? How should you interpret these Flexi-cap mutual funds? How mutual fund houses might play with this Flexi cap mutual fund category in coming weeks? What should a multicap fund investor do now?
About Flexi-cap mutual funds category
SEBI has given the green signal to introduce Flexi-cap mutual fund category now.
Flexicap mutual funds are open ended mutual fund schemes that would invest at least 65% in equity instruments and balance of up to 35% in debt and other related instruments.
These Flexi-cap mutual funds would not have restrictions on market cap like the new multicap funds which are effective from 1-Feb-2021.
SEBI also indicated mutual fund houses to classify their schemes as Flexi-cap funds and rename their existing funds to that effect. E.g. Axis Multicap fund can become “Axis Flexi-cap fund”.
New rule in Multicap funds V Flexi-cap Mutual Funds
New rules are introduced by SEBI in multi-cap funds which are effective from 1-Feb-2021.As per new rules, multi-cap fund need to invest 25% each largecap, midcap and smallcap segment. Means 75% of the portfolio has to be distributed equally among these 3 segments without having any choice to the fund manager. However, in flexi-cap funds, there is minimum of 65% investment in equity and balance in debt and related instruments. There is no such restriction about investing in midcap or small cap segment. SEBI would have just introduced new rules with new fund category instead of creating confusion of new rules for existing structure and introducing a new category.
Flexi-cap mutual funds Vs Aggressive Hybrid funds
Many are talking about the difference between a new multi-cap funds vs Flexi cap funds. However, one should also need to check about flexi-cap mutual funds vs aggressive hybrid funds which have close relationship too.
Flexi-cap funds invests 65% minimum in equity and balance in debt instruments. Even an aggressive hybrid fund would invest 65% to 80% in equity (depending on the investment objective) and balance in debt and related instruments. For me, between Flexi cap mutual funds and aggressive hybrid mutual funds, there is no much difference.
How mutual fund houses are likely to play with new Flexi-cap fund category?
There were many criticisms when SEBI introduced new rules on Multi cap funds that are effective from 1-Feb-2021. As per the new rules, fund managers are forced to change their strategy and invest 25% each in large cap, midcap and small-cap segment. This would make multi cap fund to high risk fund, which would have midcap and small cap components. Many moderate risk investors would have exited with such move. Looks based on appeal from AMFI, this new category of funds is introduced now.
Now with the introduction of Flexi-cap fund category, most of the mutual fund houses are expected to change their multicap mutual fund category to flexi-cap fund category. If they don’t, there is a risk of losing their customers.
What should a multi-cap fund investor do now?
If you are investing in multi-cap fund, you need to wait for a direction from your mutual fund house. If you receive circular or notification about change of category of your multi-cap fund to flexi cap fund, review the investment objective and any other changes. If you are investing in an aggressive hybrid fund, check that it is not duplicated in your portfolio by reviewing the investment objectives of both the fund. Once you feel comfortable, you can continue the fund else exit.
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