The Securities and Exchange Board of India (SEBI) issued a product categorisation circular in Oct 2017 that came into effect in June 2018. This circular allowed Multi-Cap funds to invest 65% of their assets in equity and equity related instruments across large cap, mid cap and small cap stocks. In September 2020, SEBI changed the fundamental attributes of Multi-Cap funds: Multi-Cap funds had to invest at least 25% of their assets in each of the three market cap segments viz. large cap, midcap and small cap.
Why did SEBI make these changes?
According to SEBI, this change was required to make Multicap funds true to their label. Ever since midcaps and small caps started correcting in 2018, many Multicap funds started shifting their portfolio allocations towards large cap and over a period of time, they started look like large cap funds.
Fund managers of many Multicap schemes wanted flexibility to manager asset allocation according to their market outlook. They were uncomfortable allocating a large percentage of their assets to mid and small caps. Hence in Nov 2020, SEBI introduced Flexi Cap Funds which are similar to Multi Cap Funds but follow a flexible asset allocation.
The difference between multi-cap and flexi-cap funds
Multi-cap funds have to invest a minimum of 75% of its assets in equity and equity related instruments and must follow the 25-25-25 rule, which requires them to invest minimum 25% across market cap segments viz. large cap, mid cap and small cap. While the fund manager still has 25% flexibility to explore investment opportunity across market cap.
On the other hand, a Flexi-cap Fund has to invest a minimum of 65% of its assets in equity and equity-related instruments with no fixed allocation towards market cap. For instance, if the fund manager feels a need to reduce exposure to small caps to zero and increase the allocation to large caps/mid-caps during economic uncertainty he/she has the flexibility to do so.
As per the latest report of December 2021 by AMFI, there are 14 schemes in Multicap category with an AUM of INR 42,860 Cr. Whereas Flexi cap category has 28 schemes with an AUM of INR 2,22,318 Cr. It is clearly indicated from the data that few AMCs had adjusted their multi-cap funds as per the mandate, but several others have converted their existing multi-cap funds to flexi-cap schemes so that they could continue with their flexibility to explore investment opportunities.