Flexi-cap mutual funds are open-ended, dynamic investment instruments that invest at least 65 per cent of their money in equity and equity-related assets of large-cap, mid-cap and small-cap stocks.
The Securities and Exchange Board of India (Sebi) introduced the flexi-cap category on November 6, 2020. Its features bear similarity with multi-cap funds.
Thus, flexi-cap funds provide wide exposure to companies with different market capitalizations, offering fund managers the freedom to invest across industry sectors. These funds ideally suit moderate investors looking for long-term investment to generate wealth, typically in five to seven years.
The flexi-cap schemes are aimed at long-term wealth growth, focusing on different industry segments. Given market volatility is a common feature, the long-term horizon of flexi-cap funds could be beneficial.
Moreover, the scheme’s diversified portfolio could protect from an unexpected decline in a particular asset or segment due to short or mid-term volatility. For instance, the fund allows for lowering its exposure to risky segments to a minimum required during a market correction.
Unlike large-cap schemes, where fund managers must maintain 80% of capital in large-cap stocks at all times, flexi-cap funds have the option to minimize their holdings in the equity market to 65%.
The same limitations come with midcap and small cap schemes where they have to invest a minimum of 65% in the companies of their respective segments.
Likewise, large-caps can’t invest more than 20% in mid-cap and small-cap companies. Hence, flexi-cap funds provide enormous flexibility to invest, depending on the performance of a particular market segment such as such as large-cap, mid-cap and small-cap.
Besides, due to the 65% requirement, flexi-cap schemes have enough room to invest in foreign markets, thereby providing global diversification. However, it is not mandatory.
In the case of multi-cap schemes, fund managers have to ensure 25% investment in all three market caps: large-cap, mid-cap, and small-cap. Flexi-cap funds have no such limit across the three segments.
Flexicap funds generally track NIFTY 500 TRI and the NIFTY 50 TRI.
Flexi-cap funds are ideal for long-term investors with moderate investing experience. It gives fund managers and owners the freedom to invest in assets based on their market outlook.
It could be suitable for those looking at an investment horizon of five to seven years when it could provide higher returns and possibly beat inflation. However, they should be prepared for possible ups and downs in their investments.
Investors should be extremely careful while choosing a flexi-cap scheme. They must know their risk appetite and tolerance before investing. For instance, flexi-cap plans can be conservative. So, it’s up to you if you are a risk-averse individual and vice-versa. However, like other schemes, flexi-cap schemes also face different market risks, including volatility, economic downturn, and geopolitical tensions.
Like any other equity funds, flexi-cap funds are taxed as equity-oriented schemes under the Income-tax Act, 1961. Profits made from a flexi-cap scheme within a year are taxed 15% flat, regardless of the slab rate. If it is more than 12 months, profits will be taxed flat at 10% after the initial exemption of Rs. 1 lakh related to all long-term capital gains.
