SEBI introduces New Category: Flexicap Funds (2020-21)

A new category of mutual funds namely, Flexicap Funds has been introduced by SEBI today vide its circular (link or download here).

As per the new definition, the funds in Flexicap category need to invest a minimum of 65% of their portfolio in equity. Interestingly, there is no restriction in terms of market-cap, i.e. fund manager is free to invest any proportion in large-caps, mid-caps and small-caps. (To know more about this, read Large Vs Mid Vs Small Cap stocks). This gives this category complete flexibility irrespective of market capitalisation of the portfolio stocks.

This comes as a relief for the investors of multi-cap funds.

About 2 months back in September 2020, SEBI had changed the definition of Multi-Cap funds. The multi-cap funds are now required to invest at least 25% each in large, mid and small-cap stocks. That is at least 75% (25% in all three caps) is the minimum required investment in equity. But before this change, there were no market-cap related restrictions in the fund category (only requirement being a minimum of 65% being invested in equities). Read more about this here at 25-25-25% change in Multicap Funds.

So now with the announcement of new category Flexicap, SEBI has brought back the multi-cap funds in the old avatar, albeit with a new category name. And this will also allow fund managers (of Flexicap funds) to make investment decisions on the basis of their strategy and conviction on individual companies instead of being limited by the market caps linked restriction (like that of multi-cap funds).

This was an expected move as I had highlighted in this post about a month back too:

There were concerns across investors, AMCs, etc. about the inability of the small-cap space to absorb such large demands from the multi-cap funds. And hence, many entities had asked the regulator to relook at the change. As a result, a new Flexicap category has been created in mutual funds now.

This no doubt increases the number of mutual fund categories. But at least the turmoil expected in multi-cap category after SEBI’s earlier announcement is expected to subside via the new category creation.

As per the circular, the AMCs now have the option to convert existing schemes to this category or can launch new funds in the category. My guess is that many existing Multicap funds will be reclassified as Flexicap funds with appropriate change in names and will continue with their existing allocations. But since this will mean a fundamental change in the attributes of the fund, the AMC will be forced to give existing investors an ‘exit-load-free’ exit option.

Further readings:

That’s it. The regulator SEBI has introduced a new ‘Flexicap’ category in mutual funds. Schemes in this category are required to invest at least 65% of their corpus in equity. However, there is no restriction in terms of large-, mid- or small-cap allocation.

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  1. i believe the unthoutful and unilateral decision of sebi two months back have already done a great damage. The record redemptions of multicap folios in September and October must have made the stupidity clear to sebi bosses. The new flexicap too will be a nonstarter and a huge flop- time will prove.

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