How are Flexicap funds different from Multicap funds?

The Securities and Exchange Board of India (SEBI) made two big announcements in the last couple of months for equity funds category.

SEBI changed the allocation rules for multi-cap funds in September last year.

Each multi-cap fund will now be required to invest a minimum of 75% in equities and related instruments. The previous rule was a minimum of 65% investment.

The new rule says  at least  25% must be invested in large, mid and small-cap companies.

The second announcement was made in November last year. This is when SEBI decided to introduce a new category of Flexicap funds.

The funds in Flexicap category must invest 65 per cent of their portfolio in equities.

Flexicap funds don’t restrict investment in terms of market-cap allocation. This means the fund manager has the liberty to invest any proportion of money in large, mid or small cap companies.

“The flexicap category was introduced as per the feedback from industry and investors. As SEBI had just changed the multi cap funds to 25:25:25 in small, mid and large cap from a 65% anywhere in equity rule. So there was a vacuum created and the flexicap category was created to fill that void,” Shweta Jain, financial planner and founder of Investography told Money9.

This gives a chance to erstwhile multicap funds to either categorise as flexicap or introduce one.

Flexicap funds will provide investors flexibility in terms of their investment choices which can be better than the 25-25-25 rules for multicap funds.

“Investors should ensure that the funds they had invested in are still aligned to their investment philosophy,” Jain suggested.

It will be riveting to see how various fund houses shift to this new category, or perhaps, create new fund houses for the same.