Capital market regulator Securities and Exchange Board of India (Sebi) has permitted mutual funds to introduce flexi cap schemes to provide increased flexibility to mutual funds, nearly two months after its asset allocation norms for multi-cap funds led to the demand for flexi cap funds.

“In order to give more flexibility to the mutual funds and taking into account the recommendations of Mutual Fund Advisory Committee (MFAC), a new category named ‘Flexi Cap Fund’ under equity schemes will be available,” Sebi said in a circular dated November 6.

A Flexi-cap fund will have to invest minimum 65 per cent of total assets in equity and equity-related instruments, but, unlike multi cap funds, there would be no restriction in allocating funds across large-cap, mid-cap and small-cap stocks.

The market regulator had, in September, made it mandatory for multi-cap funds to allocate at least 25 per cent of their portfolio to each of the three categories viz. large-cap, mid-cap and small-cap stocks by February 2021.

This fixed allocation rule had triggered concerns that many of the mid and small cap stocks did not have sound fundamentals to merit additional inflows. There were also fears that that existing multi-cap funds would be compelled to purchase mid- and small-cap stocks and these segments would not have the liquidity to absorb the extra demand.

The Association of Mutual Funds in India (AMFI) had therefore demanded the formation of a flexi cap category that would not have such stipulations.

Under the flexi cap category, fund houses will also have the option of converting existing schemes into flexi-caps. “Mutual Funds have the option to convert an existing scheme into a Flexi Cap Fund subject to compliance with the requirement for change in fundamental attributes of the scheme in terms of Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996,” Sebi said in the circular.

But since this will constitute a change in attributes, such schemes will have to give investors a 30-day window to exit, Sebi added.