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Flexi-cap funds: Will the pliability given to fund managers yield outcome?

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On November 6 final yr, the Securities and Exchange Board of India (Sebi) got here out with a round which introduced a brand new class of fairness funds: Flexi-cap. This announcement got here at an opportune time. It served each traders and fund homes properly. Investors heaved a sigh of aid, as a brand new class of fairness scheme offered publicity to firms of various sizes.

But the journey to the creation of the flexi-cap class of fairness schemes was not easy and fast. It began with the rationalisation and categorisation of schemes introduced in October 2017, whereby Sebi allowed one scheme every class — outlined by market capitalisation together with different parameters. The regulator not solely offered the definition of largecap, midcap and smallcap shares, but additionally carved out the universe for largecap, midcap and smallcap fairness funds.

Take as an example, the largecap fairness fund. According to Sebi, a largecap fund is required to speculate a minimal of 80 per cent into fairness and equity-related devices of high 100 firms by market capitalisation. This definition offered readability to traders and fund managers and addressed the issue of duplication of schemes.

Investors started investing in multicap funds — schemes that invested in largecap, midcap and smallcap shares. Multicap funds emerged as the biggest class of fairness mutual funds. As on March 31, 2020, multicap funds had belongings below administration of Rs 1.13 lakh crore.

Investors’ desire for multicap funds was not by likelihood, however a acutely aware alternative. A well-managed diversified fairness portfolio is an effective prescription for long run wealth creation.

Since few have the abilities or time to construct one, many search skilled assist and switch in direction of price environment friendly technique of mutual fund. Further, many needed their fund managers to determine on allocation to sub-segments akin to largecap, midcap and smallcap equities. And that’s the place the multicap turned the popular alternative, because it provided fund managers the pliability to spend money on firms of various sizes.

However, this heightened curiosity in multicap funds was shortlived.

On September 11, 2020, Sebi modified the allocation construction of multicap funds. It stated {that a} multicap scheme should make investments a minimal of 25 per cent every in largecap, midcap and smallcap shares. The deadline for implementing that is January 31, 2021. The transfer was triggered by a disproportionate tilt of most multicap portfolios in favour of largecap shares.

Midcap and smallcap shares had been grossly under-owned. This was not a real multicap portfolio. This change in asset allocation of those funds necessitated the creation of an fairness fund class, whereby fund managers had the pliability to spend money on firms of various sizes. To deal with this, Sebi launched flexi-cap class on November 6, 2020.

A flexi-cap fund works in a number of methods. It permits a fund supervisor to spend money on firms of all sizes with none restrictions. Fund managers can spend money on high-growth, small-sized firms to learn from excessive progress. But on the identical time, it isn’t binding to take action, which helps handle liquidity higher at any time when required.

Even although the classification of shares held adjustments, it doesn’t impression fund managers’ funding choices. A fund supervisor can keep on with his conviction bets and profit in the long run. In the grand scheme of issues, a flexi-cap scheme helps fund managers gauge the relative attractiveness of markets’ sub-segments and allocate investments accordingly. Hence, it’s vitally vital {that a} flexi-cap scheme discover its due place in a long-term investor’s fairness portfolio.

(Akash Singhania is Fund Manager of Motilal Oswal AMC. Views are his personal)

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