Sebi’s fund categorization framework divides the funds mostly on the parameter of market cap of the stocks in the portfolio. Since the companies in the various market cap brackets i.e. large cap / mid cap / small cap have different risk-return profiles, it fits into the profiling. The investor can pick and choose accordingly and allocate in the portfolio as per suitability. Given that equity valuations are at elevated levels as per conventional parameters of price-earnings multiple or total market cap to GDP ratio, you may be unsure on the allocation to various market-cap-based funds.
In this context, there is a category where the allocation to stocks of various market caps is decided by the fund manager. The essence of investing through mutual funds is that you are going with the fund manager’s stock picking skills. In the cap-based categories i.e. large / mid / small cap funds, you are deciding the framework and the fund manager is deciding the individual stocks. In a free hand to the fund manager, s/he has a free hand to decide the entire portfolio.
Now let’s look at the evolution of this ‘free hand’ since September 2020. A category called Multi Cap has been there since the initial notification issued on 6 October 2017. On 11 September 2020 Sebi issued a Circular mandating minimum 25% in each of large cap, mid cap and small cap stocks. There was a lot of debate in the market on the lack of flexibility due to this move. The issue was, till that point of time, fund managers had flexibility in allocation to stocks of various market cap companies, and the allocation was largely to large cap stocks. The preference for large cap stocks was from fund managers and investors alike. The regulation that minimum 25% should be allocated to small cap stocks was perceived as as a block imposed by Sebi. Upon representations from mutual funds, Sebi allowed a new category, on 6 November 2020, called Flexi Cap. MFs were allowed to convert an existing fund to Flexi Cap. Since this category allowed flexibility, many AMCs moved their Multi Cap funds to Flexi Cap category.
The Circular of 11 September 2020 allowed time till 31 January 2021, to Multi Cap stocks, to align to the new norms. Till early part of January 2021, there was no compulsion to invest a minimum of 25% of Multi Cap funds’ portfolio in small cap stocks. Subsequent to the second Circular, of 6 November 2020, the conversion process started for most AMCs, from Multi Cap to Flexi Cap, subject to one-month notice to investors for change of fundamental attribute.
In the new category, Flexi Cap, AUM has moved up to Rs 1.68 lakh crore in May 2021. The quantum of Rs 1.68 lakh crore is net of inflows / outflows since December 2020 and market movement i.e. when the equity market moves up, AUM moves up along with. The AUM of Multi Cap funds as on October 2020 was Rs 1.46 lakh crore, which is the date prior to the notification of 6 November 2020.
As on May 2021, the AUM of Multi Cap funds dwindled to Rs 23 thousand crore as most of the schemes were moved to the new category. As on October 2020, there were 35 schemes in Multi Cap category, which dwindled to 10 in May 2021, post conversions.
In Flexi Cap category, there are 24 schemes as of May 2021. Net-net, most of the large AMCs have moved their erstwhile Multi Cap fund to the new category. As per regulation, an AMC can have funds in both categories.
Coming to performance, we should look at returns over a long period of time as that gives a proper perspective. Over a period of 10 years till 25 June 2021, Flexi Cap funds have delivered 13.4% annualized on an average. Returns are of regular (non-direct) plan and the performance history prior to Sebi categorization is that of the earlier version of the funds. Among these funds, Kotak Flexicap has given 15.6% per year, UTI Flexi Cap has given 15.6% and Birla Sun Life Flexi has given 15.5% per year. ICICI Prudential, who have a long track record of managing their Multi Cap fund, has come out with their Flexi Cap fund NFO. ICICI Prudential will follow their in-house model, based on economic and market parameters, for allocation to stocks of various market caps. This model has been proven in their other funds.
Historically, Small Cap funds have done well vis-à-vis Large Cap funds but volatility has been higher. In the phase from demarcation of Multi-Flexi funds till mid-June 2021, Multi Cap has done better than Flexi. Going forward, volatility may tell a different story and Flexi Cap may do better than Multi, depending on the market. In fine, if you want to go with the fund managers’ choice, go for Flexi Cap.
(The writer is a corporate trainer and author. Views expressed are personal.)
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