If we look back to pre- flexicap era, investing in multi-cap funds was once the best option for those looking to diversify their portfolio with equities of companies across market capitalisation.
Also, the fund managers of multi-cap funds had the liberty to modify the fund’s asset allocation, and they could increase allocation towards a particular capitalisation to any extent.
But wait..
All of this changed when the Securities and Exchange Board of India (SEBI) took away this flexibility of multicap funds by introducing flexi-cap funds.
As per the guidelines of SEBI, a multi-cap fund should have a mandatory allocation of 25% towards each of large-cap, mid-cap and small-cap stocks.
The asset allocation to equities of each capitalisation cannot drop below 25% at any time. However, depending on the market developments, the exposure towards any capitalisation can go up to 50%, SEBI said in its circular.
After the circular, a few AMCs adjusted their multi-cap funds as per the mandate, but several others converted their existing multi-cap funds to flexi-cap schemes so that they could continue with their large cap-heavy portfolio allocations.
SEBI asked fund houses to comply with the new guidelines by making changes in the asset allocation of their multi-cap funds. If the fund houses wanted to continue following the old guidelines, they had to rename their multi-cap funds as ‘flexi-cap funds’. All fund houses (except two) opted to follow the old norms by renaming their schemes.
As of April 2021, the market reportedly had around 25 flexi-cap funds with Rs 1,59,480 Crore of AUM, and 12 multi-cap funds with Rs 19,846 Crore in AUM.
Flexi-cap funds invest in equities of companies across capitalisation with no fixed allocation towards any. The fund manager has the leeway to change the asset allocation depending on the markets. If you are worried about the high exposure of multi-cap funds towards small-cap, investing in flexi-cap funds is the right option for you.
Conclusion
FlexiCap funds provide an opportunity for investors to invest across market caps and mitigate the risk of concentration. With this philosophy, ICICI Prudential Mutual Fund has launched its Flexicap Fund.