We have been hearing a lot about Flexicap Funds of late. In this write-up I intend to talk about the a variety of elements of the flexicap fund category and why it tends to make sense for you to invest in a flexicap fund.
Historical Background
Looking at the reality that a majority of mutual fund schemes have been not accurate to their label and would invest predominantly outdoors of the sphere to which these supposedly belonged, SEBI issued a circular on the 6th October 2017 and prescribed a variety of limits for investment of their capital so as to make sure that a variety of schemes would stay accurate to their labels. The circular also defined the investment universe for broader categories of equity schemes of significant cap, midcap and modest cap funds. Under this circular, for Multicap Funds, SEBI prescribed a limit of 65% investments of their capital in equity and equity items.
During the operation of this circular, SEBI observed that multicap funds predominantly invested in significant cap funds without having labeling themselves as significant cap funds which are essential to invest a minimum of 80% of their capital in the significant cap universe of top rated one hundred corporations. In order to eliminate this bias of multicap funds to invest predominantly in significant cap corporations, SEBI issued one more circular on 11th September 2020 prescribing a minimum of 25% investment of their capital in significant cap, mid cap and modest cap corporations as per the definition laid down by SEBI in its earlier circular.
This circular of SEBI developed substantial confusion amongst the mutual fund investors. It also met with resistance from mutual fund homes due to the fact this circular successfully tied the hands of multicap funds in two methods. Firstly, it raised the minimum investment limit to 75% from the earlier limit of 65% in equity and equity items. Moreover, it restricted the maneuverability of these funds to invest across distinct capitalization segment due to the fact below the new circular they have been essential to invest minimum 25% of their capital in the corporations representing each and every of 3 broader capitalization segments.
So, SEBI introduced a new category of flexicap funds on the 6th November 2020 even though retaining the Multicap fund category. The new developed category of flexicap funds looked specifically like the multicap fund category as it stood prior to SEBI mandated segment distinct investment limits for multicap funds i.e. 65% of capital in equity on all round basis without having any segment-smart restrictions. The circular also permitted the fund homes to convert their current Multicap Fund schemes to the Flexi Cap category.
Why Flexicap Funds
The equity markets are very volatile. There is all round volatility in the industry as properly as volatility in the distinct segment of capitalization category. During the period of correction phase of the industry, requirement to invest reduce minimum proportion of capital affords chance to a scheme a buffer as the scheme can bring down its all round exposure to minimum essential. Categories like significant cap schemes are necessarily essential to invest a minimum of 80% of their capital in significant cap funds for all instances. Due this rigidity such schemes can’t bring down their exposure to equity under 80% and hence shield themselves against anticipated downturn. Against this flexicap category is essential to invest only minimum of 65% of their capital in the equity industry and hence is actually versatile.
Likewise, in the course of the volatility across the a variety of segments when the distinct segment of the industry is anticipated to do comparatively greater or worse than other segments, freedom to invest across a variety of category is a blessing for flexicap category against midcap and modest cap category exactly where they are essential to invest a minimum of 65% of their capital in the corporations falling in their respective category.
Sometimes when the significant cap category is anticipated to do greater than other segments, midcap and modest cap schemes can’t execute comparatively due to the fact their hands are tied with the requirement to invest a minimum of 65% in the corporations of their personal category. Likewise, when the modest cap or midcap category is anticipated to do greater, the significant cap schemes can’t reap the advantage of such prospective as they can only invest a maximum of 20% in midcap and modest cap corporations.
Flexicap schemes as a category let you consume the cake and have it also. This is an evergreen category and has the capacity to enable you reap the advantage usually no matter if the significant cap category is anticipated to do greater or mid and modest cap category have potentials. Moreover, due to reduce requirement of 65% the flexicap category has sufficient legroom to invest in the foreign industry and hence provide international 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 involving 28th July, 2021 and 12th August, 2021.
Taxation of Flexicap funds
Since flexicap funds are essential to invest a minimum of 65% of their capital in equity, they fall below the category of Equity-Oriented Schemes below the Income Tax Act for tax purposes. Any profit made on investment in flexi cap, inside 12 months, is taxed at a flat price of 15% irrespective of your slab price. In case you retain your investments in flexicap schemes for more than 12 months, your investment qualifies as lengthy term and gets taxed at a flat price of 10% right after the initial exemption of Rs 1 lakh. The initial exemption of Rs 1 lakh is applicable in respect of all lengthy-term capital gains earned in the course of a year on listed shares and equity-oriented schemes taken collectively on which Security Transaction Tax has been paid.
(The writer is a tax and investment specialist, and can be reached at [email protected])