Authored by Palka Chopra

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To make multi-cap funds true to its label, SEBI made it compulsory for the multi-cap schemes to have at least 25 percent each in stocks from large-cap, mid-cap and small-cap parts of the market.

With an advantage of investments across different market capitalization groups, this category has been in demand and holds one of the largest AUM in the industry (Approx Rs1.46 lakh crore as of Oct 31, 2020).

This strategy compelled fund houses to oppose this progression taken by the regulator. With the new mandate, if Fund Houses have to rebalance their existing multi-cap schemes, it would affect fund’s performances and furthermore hurt investor's interest.

Expectedly, the feedbacks were well taken by SEBI and the action taken on these feedbacks were reflected with the birth of a new category named as Flexi cap funds.

In case of multi-cap funds, the newly introduced category will allow Fund Managers to operate in the same way it used to. This category follows a rule similar to what was applicable for multi-cap funds earlier which is to invest at least 65 percent in equity instruments. To ensure that the introduction of a new category should not turn into a reason for existing multi-cap schemes to end, the regulator has given an option to fund managers to convert their existing schemes into flexi-cap funds.

Kotak Standard Multi-cap Fund, one of the largest multi-cap fund has announced that it would shift to flexi-cap category after taking requisite approvals and following due process.

In any case, this doesn't imply that all multi-cap schemes will shift to flexi-cap as this call has to be taken by the fund houses. It is known that SEBI had already given time till January 31, 2021 to rebalance the existing multi-cap scheme's portfolio. This had given investors a choice to choose between a multi cap that maintains a balanced allocation across market cap or a flexi-cap fund that invests dynamically across market caps depending on investor’s risk-taking ability.

It is quite tricky for investors to settle on a decision in light of the fact that regardless of being into existence for so long, multi-cap schemes with new mandates have no past performance record. Considering the current economic prolonged slowdown, growth prospects for mid and small-sized companies are very gloomy.

Many companies in mid and small-cap spaces are marred with corporate governance issues and concerns with respect to stability. Picking the right company from this space is very challenging for the fund managers too. Having said that, it appears to be that in the near future, flexi cap funds are likely to hold a predominant exposure to large-cap stocks.

Hence, when the tide turns in favor of mid and small cap stocks, Flexi cap may increase allocation in the segment.

As an investor,it is advised to keep a track of announcements related to multi cap funds over the coming months. Additionally, sit with your financial advisor to comprehend if the changes in the attributes are still going to fit with your initial objective and expectations from the scheme or not.

Palka Chopra is Senior Vice President at Master Capital Services. Views are personal

First Published:Oct 18, 2020 6:31 PM IST