5 questions on multi-cap and flexi-cap funds

By Ravi Samalad |  12-01-21 | 
 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

Multi-cap funds were once thought of as the go-anywhere funds. They could be flexible with their market cap allocation as the fund manager deemed fit. Now flexi-cap funds don that mantle. Which makes it confusing.

Over here, I explained the difference between dynamic asset, multi-asset and multi-cap funds. Now let us clear the air between multi-cap funds and flexi-cap funds.

Why was a new category formed?

In September 2020, the Securities and Exchange Board of India, or SEBI, came out with a circular mandating multi-cap funds to invest a minimum of 25% each in large, mid and small cap stocks. This was to circumvent the bias of some multi-cap funds that had a large-cap tilt. This month was the deadline for funds to comply with the new norms.

Fund houses expressed dismay as it would limit their ability to move across market segments. Moreover, the sudden offloading of large-cap stocks would disrupt the market. Subsequently, the Association of Mutual Funds in India, or AMFI, requested SEBI to come up with a new flexi-cap category which would help multi-cap funds transition without too much of portfolio disruption.

What is the difference between a multi-cap and a flexi-cap fund?

Multi-cap funds will now have a mandatorily allocation of 25% each to small, mid and large cap stocks. Flexi-cap funds have the leeway to dynamically invest in small, mid and large cap stocks without any restriction on the level of exposure towards these three segments.

Have all multi-cap funds undergone a change?

No. ICICI and Nippon retained their funds within the multi-cap strategy. Consequently, these funds will have to shuffle their portfolio to comply with SEBI’s market cap allocation diktat.

Based on the level of exposure towards different market segments as on November 2020, Nippon India Multi Cap Fund will have to sell about Rs 583 crore worth of large cap stocks and buy about Rs 205 crore worth mid cap stocks and Rs 379 crore worth small cap stocks. ICICI Prudential Multi Cap Fund will have to sell about Rs 857 crore worth large cap stocks and buy about Rs 254 crore and about Rs 758 crore worth stocks in mid cap and small caps, respectively.

What is the impact on an investor?

Prior to the September 2020 SEBI circular, some multi-cap funds had significant exposure to large caps. If your multi-cap fund has not changed into a flexi-cap fund, it will now take 25% exposure each to mid, large and small caps, respectively. Hence, exposure to mid- and small caps would enhance risk in the fund and can expose it to above average volatility.

If you already are invested in small and mid cap funds, your market cap allocation has gotten more risky. Investors need to see how staying put in multi-cap funds impacts their asset allocation and take a decision accordingly based on their risk profile.

Aditya Birla Sun Life Flexi Cap will now also take exposure to international stocks. If you already have a dedicated exposure to international stocks via other mutual funds, there could be chances of overlap if one has invested in a flexi-cap fund that will also take such an exposure. Such investors need to review their portfolios and seek their financial advisers’ guidance.

Most funds continue to run the new flexi-cap funds as per their existing investment mandate which is to invest across market caps. In such instances, there is no change to your portfolio.

Which are the funds that have undergone a category change?

Aditya Birla Sun Life Equity Fund

  • Renamed: Aditya Birla Sun Life Flexi Cap Fund
  • Effective: January 30, 2021

Axis Multi Cap

  • Renamed: Axis Flexi Cap Fund
  • Effective: January 30, 2021

BOI Axa Multi Cap

  • Renamed: BOI Flexi Cap Fund
  • Effective: February 3, 2021

Canara Robeco Equity Diversified Fund

  • Renamed: Canara Robeco Flexi Cap Fund
  • Effective: February 10, 2021

DSP Equity Fund

  • Renamed: DSP Flexi Cap Fund
  • Effective: January 28, 2021

Edelweiss Multi Cap Fund    

  • Renamed: Edelweiss Flexi Cap Fund
  • Effective: January 28, 2021

Franklin India Equity Fund  

  • Renamed: Franklin India Flexi Cap Fund
  • Effective from: January 29, 2021

HDFC Equity Fund      

  • Renamed: HDFC Flexi Cap Fund
  • Effective: January 29, 2021

HSBC Multi Cap Equity Fund        

  • Renamed: HSBC Flexi Cap Fund
  • Effective: January 28, 2021

IDBI Diversified Equity Fund        

  • Renamed: IDBI Flexi Cap Fund
  • Effective: January 30, 2021

IDFC Multi Cap Fund

  • Renamed: IDFC Flexi Cap Fund
  • Effective: February 9, 2021

JM Multicap Fund       

  • Renamed: JM Flexicap Fund
  • Effective: January 30, 2021

Kotak Standard Multicap Fund     

  • Renamed: Kotak Flexicap Fund
  • Effective: February 1, 2021

L&T Equity Fund

  • Renamed: L&T Flexi Cap Fund
  • Effective: February 9, 2021

LIC MF Multi Cap Fund

  • Renamed: LIC MF Flexi Cap Fund
  • Effective: February 8, 2021

Motilal Oswal Multicap 35 Fund   

  • Renamed: Motilal Oswal Flexicap Fund
  • Effective: February 6, 2021

Parag Parikh Long Term Equity Fund    

  • Renamed: Parag Parikh Flexi Cap Fund
  • Effective: January 13, 2021

PGIM India Diversified Equity Fund       

  • Renamed: PGIM India Flexi Cap Fund
  • Effective: January 31, 2020

Shriram Multicap Fund        

  • Renamed: Shriram Flexi Cap Fund
  • Effective: January 29, 2021

Taurus Starshare (Multi Cap) Fund

  • Renamed: Shriram Flexi Cap Fund
  • Effective: January 31, 2021

Union Multi Cap Fund 

  • Renamed: Union Flexi Cap Fund
  • Effective: January 28, 2021
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