Why you should invest in a Flexicap fund?

Balwant Jain

Of late Flexicap fund have been in news for more than one reasons. Let us understand what Flexicap funds  are and why they have been in new of late.

Historical Background

SEBI had issued a Circular on 6^th October 2017 to standardize scheme under various categories as well as to bring in uniformity in the characteristics of similar type of schemes. Under this circular SEBI had prescribed limit of minimum of 65% of total assets to be invested by Multicap Fund in equity products. However, SEBI had observed that the Multicap Fund had in practice were not Multicap fund as they invested their substantial assets in large cap companies. So in order to ensure that the scheme remain true to its label SEBI on 11^th September 2020 prescribed minimum of 25% of investment each in Large Cap, Mid Cap and Small Cap Companies for all the Multicap funds. These fresh guidelines created a hue and cry in the mutual fund industry as it virtually took away the freedom the fund manager had under this category to invest the funds the way they wanted which this forced SEBI to announce creation of a new category of Flexicap fund on 6^th November 2020. This prescribed a requirement to invest minimum 65% of its assets in equity on overall basis without any restriction as to the market capitalisation segment. This circular also allowed fund houses to convert their existing Multicap fund schemes into Flexicap funds.

Why Flexicap funds

Since the equity market displays volatility not only in terms of its overall performance but also in terms of relative performance of various segments like large cap fund, mid cap fund and small cap fund, it is very important for investor to be able to take the benefit of potential of any specific segment of the market dynamically to maximise its long term returns. Since average investor does not have the ability to identify the potential of specific segment, he would prefer a product which offer him that dynamism.

Large cap funds have to invest minimum of 80% of its capital in in large cap companies and midcap as well as small cap funds have to invest minimum of 65% of their capital in companies of their respective segments. With inbuilt restrictions of having to invest minimum percentage of their assets in specific segments of companies, segment specific categories of fund do not offer that dynamism and which again substantially reduces it manoeuvrability. Flexicap funds are devoid of any such rigidity and are fully flexible offering full flexibility to the fund manager to invest in the way he wishes to in any segment of the market as it is free to invest across the market segments and that too only minimum 65% of its assets.

Flexicap fund category not only give the fund manager ability to go overboard on the specific segment of the market expected to do good but also lets him reduce exposure to the segment which he expects not to do good. Moreover, with requirement to invest minimum 65% in domestic equity, the fund manager can maintain higher investments in debt or maintain cash in order to take the benefit of any correction in the overall market. The threshold of 65% investments in Indian equity gives the fund manager a better legroom to take exposure in international market at opportune time.

Since Flexicap funds have the flexibility to move across Large, Mid and Small cap segments, with requirement to invest relatively lower proportion of their capital in equity these can help you better compound your investment over long term with low risks. Flexicap funds offer you meaningful and need based diversification to your portfolio

Taxation of Flexicap funds

Since the Flexicap funds are required to maintain minimum of 65% of its capital invested in equity, it qualifies them as Equity Oriented Scheme under the Income Tax Act entitling them for concessional rate of tax on capital gains. Any profits realised on Flexicap funds within 12 months is treated as short term and is taxed at flat 15%. The profits realised beyond 12 months on such funds are treated as long term capital gains and are fully exempt upto 1 lakh every year and taxed at flat rate of 10% on balance without indexation.

I am sure this discussion will help you better understand the Flexicap fund category.

Balwant Jain is a tax and investment expert and can be reached on jainabalwant @gmail.com