Flexibility for the fund manager

A while after SEBI introduced tightly defined categories of equity mutual funds based on market capitalization, it woke up to the fact that many Asset Management Companies (AMCs) that ran multi-cap funds had portfolios that more or less mirrored other categories such as large cap, large and mid-cap or even mid-cap and small cap funds as it had set no pre-defined limits across Market-capitalizations.
SEBI then announced that Multi Cap Funds are required to hold at least 75% of their assets in equity and equity-related instruments at any point in time. Further, the portfolio must allocate at least 25% of its assets to large-cap stocks, 25% to mid-cap stocks, and another 25% to small-cap stocks. When the industry protested, SEBI back-tracked and created yet another category named Flexi-Cap Funds.

Flexi Cap Funds got defined as funds that invest at least 65% of their assets in equities and equity-related products, with a dynamic allocation between large-cap, mid-cap, and small-cap stocks. It was introduced as a new category of equity funds in November, 2020. As opposed to multi-cap funds, these funds had the leeway to provide heavier weightage in their investments across any market capitalization category, if they deemed it fit.

Any remaining portion that the fund may have, after investing in stocks across market capitalizations can be invested in debt and money market instruments. As an equity fund, Flexi Cap funds too carry inherent risk that is likely to accentuate in the short run and could potentially even out in the long Run. A plus for the Flexi-Cap category is that it offers the fund manager a much broader canvas to deploy funds and allows them to be far more nimble footed when market trends start changing. In short, it is not strait-jacketed by minimum or maximum limits across market capitalization categories. It is by and far, the closest fit to the erstwhile vanilla funds that past mutual fund investors had built their fortune on, till SEBI’s categorization of funds happened.

It is against this backdrop that I was surprised when SEBI imposed a minimum 25% across market capitalization categories for multi- cap funds. My question then (regular readers of this column might remember) was - ‘If it ain’t broken, why fix it’ ? Thankfully, better sense prevailed and the old multi-cap category which was the one that was tinkered with, made a comeback under the new label of Flexi-cap funds.

The taxation of these funds, like all other Equity category Funds is 10% for Long Term Capital Gains (LTCG) made on the sale of units of total value exceeding `1 Lakh, and 15% for Short Term Capital Gains (STCG) if the units are sold within the time period of 1 year from the date of allotment. The Benchmarks used by Flexi Cap Funds and Multi Cap Funds to evaluate their performance include the Nifty 500 TRI Index and & BSE 500 TRI Index. In the next column, we shall zoom in on the performances of some of the funds from the Flexi-Cap category.  

Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com