What are Flexicap Funds Definition, Features and Investment Benefits?

The currently accepted definition of flexicap funds in India has been put forward by SEBI (Securities Exchange Board of India). Flexicap Funds can be defined as equity mutual funds that can invest in stocks of any market capitalisation and are mandatorily required to invest a minimum of 65% of its assets in equities or equity-oriented investments.

Moreover, the equity investments of a flexicap scheme can be freely allocated across large cap, mid cap and small cap stocks without any restrictions and in a sector-agnostic fashion provided the total equity allocation of the scheme is maintained at 65% of total investible assets or higher. This ensures that the overall investment portfolio of these schemes is well diversified across multiple sectors and market capitalization.

Flexi-cap funds are a relatively recent introduction in India and these were first introduced in the SEBI circular dated 6 November 2020. Below are some key features of flexi-cap schemes that one should keep in mind:

• Minimum allocation towards equity and equity-derivatives is 65% of investible assets
• Allowed to invest in listed equity stocks across all market caps
• Can dynamically shift investments across equities of different market cap without restriction
• Allowed to invest up to 35% of portfolio in various fixed return instruments like bonds,certificate of deposits ,treasury bills , etc
• The benchmark for multi-cap scheme is typically a broad-based index which features stocks of different market caps like the Nifty 500 or the S&P BSE 500 Index
• Flexi-cap fund portfolios feature asset allocation across not just different market capitalisations but also across different sectors

Now, after reading the above features, you might wonder how flexi-cap fund differ from another type of diversified equity scheme – multi-cap funds. There are in fact two small differences between these two similar types of equity schemes.

Firstly, multi-cap funds are mandatorily required to invest at least 75% of their assets in equity and equity-oriented instruments compared to 65% allocation in the case of flexi-cap funds. Secondly, multi-cap funds cannot have lower than 25% allocation each towards large, mid and small-cap stocks. This restriction does not apply to flexi-cap funds and depending upon market conditions and fund manager’s conviction, the entire 65% equity allocation can be made into equity stocks of any market cap – large, mid or small. This results in greater flexibility and increases the chances of benefiting from changing market conditions.

Some of the key benefits that an investor gets by investing in flexi-cap funds include:

• Diversification of investments across all market caps
•  Investment diversification across multiple industries and sectors
• Flexible rebalancing of portfolio of investments as per changing market conditions
• Equity-oriented investments that have the potential to beat inflation in the long term
• Superior risk mitigation of the overall portfolio through diversification across market caps and industries/sectors
• Long term capital gains tax rules for equity investments with relatively low rates applicable after staying invested for at least 1 year
• Potentially lower volatility of investments due to the ability to change investments quickly with minimal restrictions

Considering the above benefits, it is only natural that, even though this category of mutual funds was introduced relatively recently, many investors have shown interest in Flexicap Fund investments.

Unlike ELSS tax saver mutual funds,another popular category of diversified mutual funds, investments made into flexicap funds do not offer any tax benefits. What’s more, the returns from these schemes are also taxable as per rules of mutual fund taxation applicable to equity investments. Flexicap funds have an equity allocation of 65% or more. If the holding period of flexi-cap scheme units is 1 year or longer, long term capital gains tax rate is applicable. For holding periods shorter than 1 year, short-term capital gains tax rules are applicable.

The short term capital gains tax rate for flexi-cap funds is 15% of total gains earned at the time of redemption. In the case of long-term capital gains, if total gains from equity investments for a financial year are less than Rs. 1 lakh, the applicable tax rate is nil. However, if long term gains from equities for the fiscal exceed Rs. 1 lakh, the applicable tax rate is 10% on the incremental amount without indexation benefit .

Multi-cap funds are essentially diversified equity schemes, so they may be considered as a suitable investment for long-term investors who are seeking to diversify their portfolio. However, due to the potential volatility of these investments in the short-term such investors should also have a high degree of risk tolerance. Hence, flexi-cap schemes can be considered as suitable investments by the following groups of investors:

• Investors with high risk tolerance seeking long term returns that beat inflation
• Those with an investment horizon of 5 years or longer
• Investors looking to diversify their portfolio across market caps and industries/sectors
• New investors seeking diversified investments in equities

Such investors can choose to invest in flexi-cap schemes either via a systematic investment plan (SIP) or by making a lump-sum investment . However, one should keep in mind that staying invested for the long-term i.e. for periods of 5 years or longer is essential for maximizing benefits from this type of mutual fund.