A new category in the mutual fund - Flexi Cap!

SEBI has recently announced a new category in the mutual fund - Flexi cap category.

Now the question is - 

When there are already so many categories within mutual funds, why a new category? And how this category is different from other categories?

To understand this, let's understand the new rules SEBI introduced for multicap category:

As per new rules by SEBI, multicap category should have a minimum allocation of 25% in large cap, 25% in mid cap, and 25% in small cap category. It means a minimum of 75% allocation in equity fund. Rest 25% can be invested either in equity (across large, mid or small cap) or debt.

Earlier, before this new rule, a fund manager in the multicap category was free to allocate across large cap, mid cap and small cap category. Hence, most of the fund managers had allocated a major portion in large cap category. The major reason was to avoid too much volatility of allocation in mid cap and small cap.

But after the new rule, multicap category has to invest a minimum of 25% in large cap, mid cap and small cap. This means that if the scheme in multicap fund has higher allocation in large cap and lower allocation in mid cap and small cap then fund manager would have to increase the allocation in mid cap and small cap to make it a minimum of 25%. This means the fund manager would have to sell funds from the large cap category.

The biggest problem with this approach was change in the risk profile of multicap category. With new rule, multicap category would become more volatile due to a minimum allocation of 25% in mid cap and small cap each. Hence, a lot of investors were worried about how multicap category will react to the new rule by SEBI.

Hence, SEBI has now introduced a new category of Flexi cap. In this category, fund manager would be free to allocate fund across large cap, mid cap and small cap. In other words, flexi cap is the old avatar of multicap category.

Now, fund managers in flexi cap category has to allocate a minimum of 65% in equity fund but within equity, fund managers can invest in large cap, mid cap and small cap as per their wish.

Additionally, SEBI has allowed fund managers to convert their existing scheme to flexi cap. For example, if a fund manager of multicap category does not want a minimum of 25% in large cap, mid cap and small cap then he can convert the multicap scheme into flexi cap scheme. This would mean that the fund manager does not have to reallocate the funds in multicap category as per new rules from SEBI.

So if the fund managers convert their existing multicap category into flexi cap then they will have the option to launch a new scheme under multicap category. Alternately, if the fund manager does not wish to convert the existing scheme, he can launch a new scheme under flexicap category.

In short a win-win for fund house as well as investors.

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