Flexicap funds Vs Multicap funds

How are Flexicap funds different from Multicap funds?

We answer this question in this post.

SEBI has made 2 major announcements in the last couple of months with regards to equity fund categories. First, in September 2020, it changed allocation rules for multi-cap funds. Then in November 2020, it announced a new category of Flexicap Funds.

Let’s see what is the difference between Flexicap funds and Multicap funds.

As per the new rules, the Multi cap funds will have a minimum of 25% each in large-cap stocks, mid-cap stocks and small-cap stocks. So a minimum of a 75% will be parked in equity instruments for multi-cap funds. In comparison, the new category of Flexi cap fund needs to have a minimum of 65% in equity without any restriction/requirement on market-cap wise allocations. So the fund manager has the flexibility and is free to invest any proportion in stocks from large-caps, mid-caps and small-caps.

My guess is that many of the existing multi-cap funds in India (at the time of writing in early Nov-2020) will quickly move to the new Flexicap category. And this new change will help alley the fears that many had about the potential market volatility that would have emerged from multi-cap funds trying to fit into the new definitions.

But no doubt this increases the number of mutual fund categories (which were too many to begin with).

With its announcement of new category creation, i.e. Flexicap funds, SEBI has brought back the multi-cap funds in the old avatar, albeit in a new category name.

So where Multicap funds will have to invest at least 25% each in large caps, mid-caps and small caps (totalling to 75%), the Flexicap funds as their name suggests are kind of go-anywhere funds.

Let’s take a comparative example to understand this difference between Multicap funds vs Flexicap funds.

• A Multicap fund will always have a minimum of 25% in large caps, 25% in mid-caps and 25% in small caps. The remaining 25% is at fund manager’s discretion/strategy and can be invested across large-caps and/or mid-caps and/or small caps.
• On the other hand, a Flexicap fund X needs to have minimum 65% in equity. So a fund manager can have a large & mid-cap oriented Flexi cap fund with (let’s say) 60% in large caps, 30% in mid-caps and only 10% in small-caps. Another fund manager may want to run a mid-&-small-cap oriented Flexi cap fund with (let’s say) 25% in large caps and 75% in mid and small-cap stocks. Both funds will fit into the definition of Flexi-cap funds.

So the newly created Flexi-cap category does provide managers with sufficient flexibility in terms of investment choices. And it’s much higher than that of Multicap fund’s 25-25-25 Rule.

SEBI had brought about the Multicap rule change with the agenda of making funds more true-to-label. With this additional move to create a new Flexicap category of equity funds, it had definitely taken a step in the direction of making fund categories more true to label.

Further readings:

• What are Large-cap funds and where do they invest?
• Should you invest in Sector funds?
• Should I shift from Large-cap funds to Index Funds?
• List of Index Funds in India
• Large-cap vs Mid-Cap vs Small-cap stocks in mutual funds
• Should SEBI revisit Large & Midcap definitions?

It will be interesting to see how various fund houses shift existing Multicap funds to the new category or launch new funds (NFOs) in the new category. So that was about Flexicap funds Vs. Multicap Funds and the differences between them.