SEBI Creates ‘Flexi-Cap’ Category To Help Mutual Funds Meet Multi-Cap Rules
The logo of Securities and Exchange Board of India (SEBI) is pictured on the door handle of a corference room at the market regulator hearquarters in Mumbai, India. (Photo: BloombergQuint)

SEBI Creates ‘Flexi-Cap’ Category To Help Mutual Funds Meet Multi-Cap Rules

The market regulator created a new 'flexi-cap fund' category, giving asset managers more leeway on composition of equity schemes after changes in allocations earlier in the year reduced flexibility for multi-cap funds.

The newly created category requires a minimum investment into equity and equity-related instruments worth 65% of total assets, the Securities and Exchange Board of India said in a circular on Friday. As the name flexi-cap suggests, it will allow the mutual funds to invest in the equity of companies irrespective of market capitalisation.

In September, SEBI had changed the minimum allocations in multi-cap funds to make them more true-to-label. Mutual funds had until February of 2021 to reshuffle their multi-cap fund portfolios to have 75% of assets in equity, with 25% each in large-, mid-, and small-cap companies. They also had the option of converting multi-cap funds into large-, or large-and-mid-cap funds.

The mutual funds’ lobby then made a representation seeking a new category of funds that would allow rebranding of existing multi-cap schemes without much upheaval.

“Mutual funds have the option to convert an existing scheme into a Flexi Cap Fund subject to compliance with the requirement for change in fundamental attributes of the scheme,” SEBI said in the circular. Schemes under the new category can be launched with immediate effect.

Arvind Rao, certified financial planner and founder of Arvind Rao & Associates, said the regulator usually provides unitholders of existing schemes the freedom to choose. “In similar instances in the past, when there as a change in the nature of a scheme, mutual funds have been required to intimate unitholders of the change, and provide them with an option to either stay invested or redeem their investments at no cost.”

The new regulation would benefit investors who want complete flexibility in ownership of companies, irrespective of market capitalisation, according to Akhil Chaturvedi, associate director and head of sales at Motilal Oswal Asset Management Company.

“This will also give flexibility to managers to make investment decisions basis their conviction on the companies irrespective of their market caps," Chaturvedi said. "Since this a new category which is getting created, most multi-cap funds may get their schemes reclassified into flexi cap category.”

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