Ramesh had set his savings aside to invest in mutual funds. But he did not want to limit his earning potential by investing in large-cap funds. Neither did he want to risk his savings by putting money in small- and mid-cap funds. Luckily, he was not without options. He got to know about flexi-cap funds. After finding out what are flexi-cap funds, he knew exactly where to invest his money.

If you are wondering what flexi-cap funds and it’s meaning, and if they are worth your money, you are at the right place.

1. What is a flexi-cap fund?

Flexi-cap fund, meaning flexible cap fund, is a mutual fund where the fund manager has no restriction to investing your money in companies based on their market capitalization. As per SEBI’s notification, these funds are open-ended and dynamic equity schemes where you invest your money in companies with varying capitalizations – small-, mid-, and large-cap. 

Flexi-cap funds allow investors to diversify their portfolios by opening different stocks but not limiting them to any one of them. They also give fund managers the flexibility to modify your portfolio with respect to the changes in market valuations as well as macroeconomic conditions.

Now that you know what a flexi-cap mutual fund is let us see how they exactly work.

2. How does a flexi-cap fund work?

Flexi-cap funds require investors to invest 65% or more of the scheme’s assets in equities and related instruments. In addition to not being restricted to a single segment, the fund manager can shift assets to different market cap segments if the market does not perform well. 

As a result, flexi-cap funds are not only a great investment scheme but a stable one that offers decent returns. You can invest in profitable companies with an excellent track record. In case your investment underperforms, you can exit the current and shift to different segments.

3. Why are flexi-cap funds popular?

Here are some reasons why flexi-cap funds are so popular among investors.

  • Portfolio diversification

The biggest factor driving the popularity of flexi-cap funds is the fact they provide equity exposure. You can invest in stocks of companies operating across different sectors and with different market caps. 

  • Lower risk of market volatility

Investors get exposure to a broad equity market (both sectors and companies). Your investments earn decent returns, but in the long run, you can manage a much higher range of highs and lows in the equity market.

  • Hedge against inflation

Considering the lower risk of market volatility, flexi-cap funds are the best way to park your funds compared to fixed deposits, recurring deposits, and savings accounts. 

  • Maximize your returns

Once you invest in a flexi-cap fund, your investment is not stuck in the scheme. In case the underlying assets underperform, or there are better opportunities, the fund manager can re-allocate to different market caps to maximize returns.

4. Things to keep in mind

Portfolio diversification, hedging against inflation, and decent returns with many risks make flexi-funds an attractive investment. But before you go ahead and invest in one, here are some things about flexi-funds you should keep in mind:

  • Flexi-cap funds vs. multi-cap funds

Flexi-cap funds and multi-cap funds are similar but on the same mutual fund investment schemes. Multi-cap funds also invest your money in companies with different capitalizations, but they are not as flexible. Unlike flexi-cap funds, multi-cap funds require investors to maintain at least 75% of the assets in each segment (25% each in small-, mid-, and large-cap stocks). 

In case investors decide to shift market segments, they must still maintain 75% asset allocation. In contrast, flexi-cap funds only have a minimum asset allocation of 65%. But there is no minimum asset allocation limit for each individual market cap segment. 

  • Taxation

Flexi-cap funds are taxable under the Income Tax Act, 1961, like other equity schemes. Returns you earn are capital gains, and depending on the tenure of your investment, you pay:

  • Short-term capital gains tax

You will pay a 15% tax on profits you make from your investments with a tenure of one year or less. 

  • Long-term capital gains tax

If your investment tenure is more than one year, you will pay 10% tax on the returns you earn. However, you only pay the tax after the initial exemption of Rs. 1 lakh.

Final Words

Now you know what a flexi-cap mutual fund is. So, are they a good investment for you? If you have a moderate risk appetite but want exposure to the equity market, you should invest in flexi-cap funds. Also, if you are comfortable investing your money for a longer tenure, i.e., 5 years or more, flexi-funds are a great investment and will earn you decent returns.

If you plan to invest in flexi-cap mutual funds, check out Moneyfy by Tata Capital – an investment platform offering the best-performing flexi-cap mutual funds. To register, visit our website or download the app on your smartphone. Register using your phone number, compare different mutual funds and start your investment journey with just Rs. 100 per month.

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