All you wanted to know about Flexicap Funds

By: |
July 06, 2021 11:34 AM

Here we take a look at the various aspects of the flexicap fund category and why it makes sense for you to invest in a flexicap fund.

Over longer horizons, equities tend to outperform most asset classes.Over longer horizons, equities tend to outperform most asset classes.

We have been hearing a lot about Flexicap Funds of late. In this article I intend to discuss the various aspects of the flexicap fund category and why it makes sense for you to invest in a flexicap fund.

Historical Background

Looking at the fact that a majority of mutual fund schemes were not true to their label and would invest predominantly outside of the sphere to which these supposedly belonged, SEBI issued a circular on the 6th October 2017 and prescribed various limits for investment of their capital so as to ensure that various schemes would remain true to their labels. The circular also defined the investment universe for broader categories of equity schemes of large cap, midcap and small cap funds. Under this circular, for Multicap Funds, SEBI prescribed a limit of 65% investments of their capital in equity and equity products.

During the operation of this circular, SEBI observed that multicap funds predominantly invested in large cap funds without labeling themselves as large cap funds which are required to invest a minimum of 80% of their capital in the large cap universe of top 100 companies. In order to remove this bias of multicap funds to invest predominantly in large cap companies, SEBI issued another circular on 11th September 2020 prescribing a minimum of 25% investment of their capital in large cap, mid cap and small cap companies as per the definition laid down by SEBI in its earlier circular.

This circular of SEBI created huge confusion amongst the mutual fund investors. It also met with resistance from mutual fund houses because this circular effectively tied the hands of multicap funds in two ways. Firstly, it raised the minimum investment limit to 75% from the earlier limit of 65% in equity and equity products. Moreover, it restricted the maneuverability of these funds to invest across different capitalization segment because under the new circular they were required to invest minimum 25% of their capital in the companies representing each of three broader capitalization segments.

So, SEBI introduced a new category of flexicap funds on the 6th November 2020 while retaining the Multicap fund category. The new created category of flexicap funds looked exactly like the multicap fund category as it stood before SEBI mandated segment specific investment limits for multicap funds i.e. 65% of capital in equity on overall basis without any segment-wise restrictions. The circular also allowed the fund houses to convert their existing Multicap Fund schemes to the Flexi Cap category.

Why Flexicap Funds

The equity markets are highly volatile. There is overall volatility in the market as well as volatility in the specific segment of capitalization category. During the period of correction phase of the market, requirement to invest lower minimum proportion of capital affords opportunity to a scheme a buffer as the scheme can bring down its overall exposure to minimum required. Categories like large cap schemes are necessarily required to invest a minimum of 80% of their capital in large cap funds for all times. Due this rigidity such schemes cannot bring down their exposure to equity below 80% and thus shield themselves against expected downturn. Against this flexicap category is required to invest only minimum of 65% of their capital in the equity market and thus is really flexible.

Likewise, during the volatility across the various segments when the specific segment of the market is expected to do relatively better or worse than other segments, freedom to invest across various category is a blessing for flexicap category against midcap and small cap category where they are required to invest a minimum of 65% of their capital in the companies falling in their respective category.

Sometimes when the large cap category is expected to do better than other segments, midcap and small cap schemes cannot perform relatively because their hands are tied with the requirement to invest a minimum of 65% in the companies of their own category. Likewise, when the small cap or midcap category is expected to do better, the large cap schemes cannot reap the benefit of such potential as they can only invest a maximum of 20% in midcap and small cap companies.

Flexicap schemes as a category let you eat the cake and have it too. This is an evergreen category and has the ability to help you reap the benefit always whether the large cap category is expected to do better or mid and small cap category have potentials. Moreover, due to lower requirement of 65% the flexicap category has enough legroom to invest in the foreign market and thus provide global diversification. ICICI Prudential, which did not have any scheme in this category, are joining the club. Their New Fund Offer for their flexi cap fund is open between 28th July, 2021 and 12th August, 2021.

Taxation of Flexicap funds

Since flexicap funds are required to invest a minimum of 65% of their capital in equity, they fall under the category of Equity-Oriented Schemes under the Income Tax Act for tax purposes. Any profit made on investment in flexi cap, within 12 months, is taxed at a flat rate of 15% irrespective of your slab rate. In case you retain your investments in flexicap schemes for more than 12 months, your investment qualifies as long term and gets taxed at a flat rate of 10% after the initial exemption of Rs 1 lakh. The initial exemption of Rs 1 lakh is applicable in respect of all long-term capital gains earned during a year on listed shares and equity-oriented schemes taken together on which Security Transaction Tax has been paid.

(The writer is a tax and investment expert, and can be reached at jainbalwant@gmail.com)

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