Flexicap mutual funds: How they can help your portfolio, tax implication

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SEBI had issued a Circular on 6th October 2017 to standardize scheme under various categories as well as to bring in uniformity in the characteristics of similar type of schemes. Under this circular, SEBI had prescribed a limit of minimum of 65% of total assets to be invested by a multicap fund in equity products. However, post implementation, SEBI observed substantial assets if many multicap Fund were invested in large cap companies.

So, in order to ensure that the scheme remains true to its label, SEBI on 11th September, 2020, prescribed that for a Multicap fund, a minimum of 25% each should be invested across Large Cap, Mid Cap and Small Cap companies. These fresh guidelines created a hue and cry in the mutual fund industry as it virtually took away the freedom the fund manager had under this category to invest funds the way they wanted.

Post deliberation, SEBI announced the creation of a new category of Flexicap Fund on 6th November, 2020. In this category of equity mutual fund, the only requirement prescribed was that on an overall basis, a minimum of 65% of assets will be invested into equities. Here the fund manager is free to invest across market capitalisation without any restrictions. This circular also allowed fund houses to convert their existing multicap fund schemes into flexicap funds.

Why Flexicap Fund?

Since the equity market displays volatility not only in terms of its overall performance but also in terms of relative performance of various segments like large cap fund, mid cap fund and small cap fund, it is very important for an investor to tap into the potential opportunities any specific segment of the market has to offer as a means to maximise one’s long term returns at any given point of time. Since a common man does not have the ability to identify the potential of a specific segment, it is ideal to stay invested in a product which helps them achieve this.

A large cap fund has to invest minimum of 80% of its capital in large cap companies while midcap and small cap funds have to invest a minimum of 65% of their capital in companies of their respective segments. With inbuilt restrictions of having to invest minimum percentage of their assets in specific market segments, investing in segment specific categories puts a cap on the dynamism and manoeuvrability of the fund. In comparison, Flexicap funds are devoid of any such rigidity and offer the fund manager maximum freedom in terms of market capitalisation allocation.

As a result, based on the evolving market conditions, the fund manager can go overweight or underweight on any particular market segment. Moreover, with the requirement to invest a minimum of 65% in domestic equity, a portion of upto 35% of the portfolio can be invested in debt or maintained in cash or cash equivalents in order to reap the benefit from any correction in the overall market. The threshold of 65% investments in Indian equity on overall basis also allows the fund manager a better legroom to take exposure in international market at an opportune time.

Apart from all these, flexicap funds can offer meaningful and need based diversification to one’s portfolio. ICICI Mutual Fund which does not have any flexicap fund is joining the club with a new fund offer which is open from 28th June to 12th July, 2021.

Taxation of Flexicap funds

Under the Income Tax Act, a flexicap fund is considered an equity mutual fund making the gains made from investment in this category eligible for concessional rate of tax. Any profit realised within 12 months is treated as short term and is taxed at a flat rate of 15%. The profits realised beyond 12 months on such a fund are treated as long term capital gains and are fully exempt up to Rs.1 lakh every year and taxed at a flat rate of 10% on balance without indexation.

Balwant Jain is a tax and investment expert and can be reached on jainabalwant@gmail.com

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