These Multi Cap Funds Will Be Reclassified as Flexi Cap Funds. What Should Investors Do?

Nov 18, 2020

Fund managers of multi cap funds are happy about SEBI's recent announcement regarding the introduction of Flexi cap funds as a new category under Equity schemes. Flexi cap funds are characterised as schemes investing minimum 65% of its assets in equity and equity related instruments with dynamic allocation across large cap, mid cap, and small cap stocks.

With this new category, fund managers of multi cap funds now have a way out if they are apprehensive about the idea of reshuffling their multi cap fund portfolio to align with the recent change in definition of this category. If you recall, SEBI had in September issued guidelines asking multi cap funds to invest at least 75% of its total assets in equities, with at least 25% exposure each in large cap, mid cap, and small cap stocks.

Since most multicap funds hold a large cap biased portfolio and due to lack of investment opportunities and liquidity constraints in smaller caps, many multi cap funds were apprehensive about the change in definition of these funds. The move was also likely to make multicap funds riskier for investors, due to its higher allocation to mid and small caps.

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Many multi cap funds holding a predominant exposure to large caps are expected, therefore, to reclassify itself as flexi cap fund. Some prominent multi cap funds have already announced their plans to convert into flexi cap funds.

Find out what these funds have to say about the reclassification to the flexi cap category:

Kotak Standard Multicap Fund

Kotak Standard Multicap Fund, the largest scheme in the multi cap funds category, has announced that it would shift to flexi cap category after taking requisite approvals and following due process. Nilesh Shah, Group President and MD,  Kotak Mahindra Asset Management Company has clarified that except the name of the fund (to be renamed as Kotak Standard Flexi cap Fund), everything else including the fund manager, investment process, and fund portfolio will remain the same as before.

Parag Parikh Long Term Equity Fund

Neil Parag Parikh, Chairman and CEO, PPFAS MF, has welcomed SEBI's move stating that the flexicap strategy will allow the fund manager to invest wherever value and opportunities are available without any market cap restrictions. Parag Parikh Long Term Equity Fund will continue to operate under the new flexi cap category, after taking all necessary approvals and following the due process. There will be no change in the fundamental characteristics, investment strategy and process of the scheme, except for change in name.

Motilal Oswal Multicap 35 Fund

MotilalOswal Multicap 35 Fund will be reclassified as flexi cap fund and the proposed name of the fund could be 'Motilal Oswal Flexi Cap 35 Fund'. MotilalOswal AMC has stated that there would be no change in the way the fund is being managed currently. Akash Singhania will continue to be the fund manager of the scheme. The fund will soon initiate the process to take requisite approvals and complete the necessary formalities.

What should investors do?

It is clear from the statement of the respective funds that except for the change in name, the portfolio characteristics, investment processes and strategy, the fund manager, etc. will be the same. Therefore, there is no reason to be worried about the change in category of these multi cap funds to flexi cap funds.

Do note that flexi cap funds have the flexibility to change allocation to any particular market cap based on their outlook and growth prospects.

In the near term, flexi-cap funds are likely to hold a predominant exposure to large caps stocks. However, as and when the tide turns in favour of mid and small cap stocks, flexi cap funds may increase allocation in the segment.

Smaller caps are prone to higher volatility, which can increase the risk to the portfolio. That said, the presence of large caps in the portfolio would offset some of the volatility. This makes flexi cap funds suitable for investors having moderate to high risk appetite and an investment horizon of at least 5 years.

If a particular change in attribute of the scheme that you have invested in does not match your initial investment objective and expectations that you had while investing in the scheme consider revaluating your investment portfolio and make changes if necessary.

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Warm Regards,
Divya Grover
Research Analyst


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