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Indian mutual funds appear to be inordinately pleased with SEBI’s latest circular allowing them to add yet another category — flexicap funds — to their existing 36-category repertoire. Fund houses running large multicap schemes have been prompt to announce their conversion into flexicap funds. The reasons for this relief are not far to seek. The industry has been in a tizzy ever since the regulator decreed on September 11 that multicap schemes ought to stick to a minimum exposure of 25 per cent in large-, mid- and small-cap stocks, in the interests of truth in labelling. Multicap schemes have always tactically switched between different market cap segments based on market conditions.
Recently, due to expensive markets, they had parked over two-thirds of assets in large-caps with token mid- and small-cap exposures. SEBI’s diktat would have forced the industry to move about ₹30,000 crore into small-caps and ₹11,500 crore into mid-caps before January 1.
This would have entailed high impact costs, given the notoriously shallow market depth in these segments. With small-caps rallying hard since March, funds would have had to acquire these positions at stiff valuations too. With the Nifty500 index, the multicap fund benchmark, featuring only a 6 per cent weight to small-caps and 16 per cent to mid-caps, multicap funds would have been rendered less comparable to their benchmark too. All this had investors wondering if they should bail out of the multicap category for good. While MFs were lobbying hard with SEBI to reverse this move, speculators were busy building up short-term positions in small-caps to front-run them, leading to speculative froth. All this leads one to wonder whose interests SEBI was trying to protect when it mooted this idea. With its November 6 circular opening an escape hatch for multicap managers, they now have the comfortable option of simply renaming their schemes as ‘flexicap’, while changing nothing. This status quo is in the interests of investors who can now avoid unnecessary churn and taxes on their holdings. Next time perhaps, SEBI should think twice before fixing something that isn’t really broken.
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