K Sudarsha, Mysore, Karnataka
Equity mutual funds can be further divided into 15 sub-categories. Each has its own unique purpose and features. Within these categories, the flexi-cap category stands out, offering the flexibility to invest across companies of various market capitalisations. This adaptability makes them an attractive choice for investors looking to diversify their portfolios while tapping into the growth potential of different market segments.
Before we jump into understanding what flexi-cap mutual funds are, it is important that we understand what are the different classifications of companies based on their market capitalisation.
The SEBI has classified these companies into three distinct segments: large-cap, mid-cap, and small-cap. This classification is pivotal for investors, mutual funds, and the overall market as it influences investment strategies and risk assessment.
SEBI's classification helps in creating a structured approach to investing. It aids investors in identifying companies based on their market cap and aligning them with their investment goals and risk appetite.
Mutual funds also use this classification to create diversified portfolios that cater to different investor segments. For instance, large-cap funds invest primarily in the stocks of large-cap companies, providing stability and steady returns, while mid-cap and small-cap funds aim for higher growth, albeit with a higher risk.
The classification also ensures uniformity in the categorisation of companies, which is essential for benchmarking and comparison. It provides a clear framework for the mutual fund industry to structure their schemes and for investors to understand where their money is being invested.
Flexi-cap mutual funds are open-ended dynamic equity schemes that invest across large-cap, mid-cap, and small-cap stocks. The defining characteristic of these funds is the absence of any SEBI imposed restrictions on the allocation across market caps, allowing fund managers to tailor the portfolio in response to changing market conditions and opportunities.
SEBI introduced the flexi-cap category in November 2020, with the aim of providing a clear and distinct identity to funds that have the leeway to invest across market caps without any prescribed limits. As per SEBI's mandate, flexi-cap funds must invest a minimum of 65% of their total assets in equity and equity-related instruments.
Unlike other fund categories such as large-cap mutual funds that have specific allocation mandates for different market caps, flexi-cap funds are not bound by such constraints. This means that fund managers have the discretion to invest in large-cap, mid-cap, or small-cap stocks based on their investment strategy and market outlook.
For instance, while large-cap are mandated under SEBI regulation to invest 80% of their corpus in large-cap companies, flexi-cap funds do not face such limitations.
The inherent flexibility of flexi-cap funds allows for strategic shifts between market caps, enabling fund managers to capitalise on market rallies or protect the portfolio during downturns. This flexibility can potentially lead to better risk-adjusted returns over the long term.
In the diverse world of mutual funds, investors are often presented with a plethora of options, each tailored to different market conditions and investment goals. Among these, flexi-cap and multi-cap mutual funds stand out as popular choices for those looking to diversify their portfolios across various market capitalisations.
However, understanding the nuances between these two fund categories is crucial for making informed investment decisions. We have discussed flexi-cap mutual funds and their investment approach above.
On the other hand, multicap mutual funds operate under a specific mandate set by SEBI. These funds are required to maintain a minimum investment of 25% in each category of large-cap, mid-cap, and small-cap stocks. This regulation ensures a balanced exposure to different market segments, potentially reducing risk through diversification while still allowing for growth opportunities.
Allocation and volatility: The primary distinction between flexi-cap and multi-cap funds lies in their allocation strategy. While multicap funds are bound by the SEBI mandate to invest a minimum of 25% in each market cap category, flexi-cap funds are at the discretion of the fund manager, who can adjust allocations based on market conditions and investment outlook.
This difference in allocation also influences the volatility and risk profile of the funds. Multicap funds, due to their mandatory investment in mid and small-cap stocks, may exhibit higher volatility and aggressive growth potential.
Flexi-cap funds, with their adaptable approach, can potentially offer a more balanced risk-reward ratio, as the fund manager can shift focus to more stable large-cap stocks during market downturns or explore growth in small caps when favourable.
Goals and risk appetite: Investors should consider their financial goals and risk appetite when choosing between flexi-cap and multi-cap funds. Those with higher risk tolerance and a focus on aggressive growth may find multi-cap funds appealing due to their exposure to mid and small-cap stocks. Conversely, investors seeking a more controlled approach that adapts to market changes might prefer the strategic flexibility offered by flexi-cap funds.
Both flexi-cap and multi-cap mutual funds offer unique advantages and cater to different investment strategies. By understanding the key differences in allocation requirements and volatility, investors can make choices that align with their individual financial objectives and market outlook.
Flexi-cap mutual funds have garnered attention for their unique ability to adapt to market conditions by allocating assets across various market capitalisations without restriction. This flexibility is a significant advantage for investors looking for a diversified portfolio with the potential for substantial returns.
Investing in flexi-cap mutual funds can be a strategic move for those seeking a balanced and adaptable investment vehicle. With their unique advantages, these funds continue to be a popular choice among discerning investors looking to optimise their portfolios for growth and stability.
The Union Budget 2024 has introduced significant changes to the taxation of mutual funds, particularly affecting flexi-cap mutual funds. This blog post delves into the details of the new tax rules and offers insights into how they may impact your investments in flexi-cap mutual funds.
The Budget 2024 has overhauled the capital gains tax structure for mutual funds. Here's a summary of the key changes:
The increase in STCG tax from 15% to 20% will affect those who prefer to trade frequently or redeem their investments within a short period. This change emphasises the government's focus on encouraging long-term investments over short-term trading.
Investors may need to reconsider their investment strategies in light of these changes. Here are some strategies to consider:
Flexi-cap mutual funds offer a unique blend of flexibility and diversification, making them a compelling option for investors seeking exposure to equities across market caps. With the ability to adapt to market changes and the freedom to invest without cap-specific constraints, flexi-cap funds can be a valuable addition to an investor's portfolio.
For those interested in exploring this investment avenue, it's crucial to stay informed about the latest SEBI regulations and market trends to make well-informed decisions. As always, consulting with a financial advisor can provide personalised guidance tailored to individual financial objectives and risk tolerance.
Kuvera is a free direct mutual fund investing platform. Unless otherwise stated data sourced from BSE, NSE and kuvera.
