Flexi-Cap Funds for Smart Investing

Are you tired of the same old mutual funds that limit your investment options and returns? Do you want to explore the full potential of the stock market and invest in the best companies across all sizes and sectors? If yes, then you need to check out the flexi-cap fund – the ultimate choice for the smart investor.

A flexi-cap fund is a type of equity fund that gives you the freedom and flexibility to invest in any company, regardless of its market capitalization. Whether it is a large-cap, mid-cap, or small-cap stock, a flexi-cap fund can invest in it, as long as it offers value and growth. A flexi-cap fund can also invest in any sector, from banking to IT to pharma to FMCG, and more.

Let’s explore everything we need to know about the flexi-cap fund, how it works, and why it is the best option for us. Get on board to learn the secrets of the flexi-cap fund!

Flexi-Cap Funds: What Does It Mean?

A flexi-cap fund is a kind of mutual fund that does not follow any rules or boundaries when it comes to investing in the stock market. A flexi-cap fund can choose any company, big or small, from any sector or industry, as long as it has the potential to grow and earn profits. A flexi-cap fund gives the fund manager the freedom and flexibility to pick the best stocks for the fund based on their research and analysis.

But what is a stock, and how do we measure its size? A stock is a share of ownership in a company. The size of a company is determined by its market capitalization, or market cap, for short. The market cap is the total value of all the shares of a company in the market. It is calculated by multiplying the number of shares by the current market price of each share. Based on market cap, companies are divided into three groups:

• Large-cap: These companies have a market cap of more than Rs. 20,000 crore. Large cap companies are the big players in the market, with a strong reputation and stable performance. They are usually well-known and well-established brands, such as Reliance, HDFC, TCS, etc.
• Mid-cap: Companies with a market cap between Rs. 5,000 crore and Rs. 20,000 crore. These are the emerging stars in the market, with high growth potential and moderate risk. They are usually innovative and dynamic companies, such as Bajaj Finance, Biocon, MRF, etc.
• Small-cap: Small-cap firms are those whose market capitalization is under Rs. 5,000 crore. These are the hidden gems in the market, with very high growth potential and a very high risk. They are usually new and niche companies, such as Affle India, Dixon Technologies, Laurus Labs, etc.

How Does It Work?

A flexi-cap fund works by adjusting its portfolio according to the changing market scenarios and opportunities. The fund manager can shift the allocation of the fund among large-cap, mid-cap, and small-cap stocks, based on their risk-reward profile and valuation.

For example, when the market is bullish and the large-cap stocks are performing well, the fund manager can increase the exposure to large-cap stocks to capture the upside potential. On the other hand, when the market is bearish and the large-cap stocks are overvalued, the fund manager can reduce the exposure to large-cap stocks and increase the exposure to mid-cap and small-cap stocks, which may offer better value and growth prospects.

A flexi-cap fund can also change its sectoral allocation, depending on the fund manager’s outlook and research. For instance, if the fund manager expects the IT sector to benefit from the digital transformation and global demand, he or she can increase the allocation to IT stocks. Conversely, if the fund manager anticipates that the pharma sector will face regulatory challenges and pricing pressures, he or she can reduce the allocation to pharma stocks.

Flexi-Cap Fund: Example

To get a better understanding, let’s approach it this way. What if you could explore the whole stock market with a fund that can adapt to any situation and opportunity? That’s what the ABC Flexi Cap Fund offers you. This imaginary fund, with a whopping Rs. 10,000 crore in its kitty, is not your usual investment option. Its secret? A flexi-cap strategy, which lets it invest in any company, no matter how big or small, or which sector it belongs to. As we follow the journey of this fund until March 31, 2024, we discover a portfolio that reflects the richness and potential of the market itself.

Initially, the ABC Flexi Cap Fund was anchored in a balanced yet bold allocation:

• Large-cap stocks: The behemoths of the market, constituting 50% of the portfolio with an investment of Rs. 5,000 crore, provide stability and reliability.
• Mid-cap stocks: The agile contenders, making up 30% (Rs. 3,000 crore), are known for their growth potential.
• Small-cap stocks: The spirited explorers, forming 20% of the fund (Rs. 2,000 crore), offer high rewards for those willing to embrace risk.

The sectoral horizon was equally diverse, with investments spread across the pillars of the economy:

• Banking: The backbone, with a 20% allocation.
• IT: The innovators, at 15%, are thriving on the digital wave.
• Pharma and FMCG: The essentials, each holding 10%, cater to the perennial needs of society.
• Others: A wide array of sectors, making up 45%, showcasing the fund’s embrace of opportunities across the spectrum.

In response to these changing tides, the fund’s captain, the astute fund manager, decided to steer the portfolio towards more promising waters:

• Large-cap allocation was reduced to 40%, freeing up resources to capitalise on emerging opportunities.
• Mid-cap and small-cap allocations were increased to 35% and 25%, respectively, betting on their potential for superior growth.
• The sectoral compass was also recalibrated:
  • Banking’s share was trimmed to 15%, reflecting a cautious approach towards this volatile segment.
  • IT’s allocation was boosted to 20%, doubling down on the digital gold rush.
  • Pharma was scaled back to 5%, navigating away from the stormy conditions.
  • FMCG remained a steady 10%, while others expanded to 50%, casting a wider net for opportunities.

Flexi-Cap Funds: Advantages

Flexi cap funds offer several benefits to the investors, such as:

• Diversification: Flexi cap funds can invest in a wide range of companies and sectors, which can reduce the overall risk of the portfolio and enhance returns. By investing in different market caps and sectors, flexi cap funds can benefit from the different phases of the market cycle and the economic cycle.For example, large-cap stocks can provide stability and resilience during market downturns, while mid-cap and small-cap stocks can offer higher growth and returns during market upturns. Similarly, different sectors can perform differently depending on macroeconomic factors, consumer preferences, and technological innovations. Flexi cap funds can diversify their portfolio across various sectors, such as banking, IT, FMCG, pharma, etc., to capture the opportunities and mitigate the risks in each sector.
• Flexibility: Flexi cap funds can adapt to changing market conditions and opportunities, which can improve the performance of the fund. By shifting the allocation among large-cap, mid-cap, and small-cap stocks, flexi cap funds can balance the stability of large-cap stocks with the growth potential of mid-cap and small-cap stocks. By changing the sectoral allocation, flexi cap funds can also take advantage of emerging trends and themes in the market, such as digitalization, e-commerce, healthcare, etc. Flexi cap funds can also switch between value and growth investing styles, depending on market sentiment and valuation. Flexi cap funds have the freedom to adjust their portfolio in line with the fund manager’s view and conviction, without being constrained by any predefined mandate or benchmark.
• Professional management: Qualified and experienced fund managers oversee Flexi cap funds. They possess the knowledge and tools necessary to analyse the companies and the market. The fund managers can use their research and judgement to select the best stocks for the fund and adjust the portfolio accordingly. The fund managers can also leverage the insights and support of a team of analysts, researchers, and advisors, who can provide valuable input and feedback on market trends and opportunities. Investing in flexi cap funds allows investors to benefit from the professional management of their money, without having to worry about the complexities and challenges of stock selection and portfolio rebalancing.

Flexi-Cap Funds: Tax Details

Flexi cap funds are a type of mutual fund that has the flexibility to invest across market capitalizations, sectors, and themes. They are classified as equity funds, since they allocate at least 65% of their portfolio to equity and equity-related instruments. This means that they are also taxed like equity funds, based on how long the investor holds the fund units before selling them.

The holding period is the duration for which the investor remains invested in the fund. It determines whether the gains from selling the fund units are classified as short-term or long-term capital gains. Short-term capital gains (STCG) are the profits made from selling the fund units within one year of investment. Long-term capital gains (LTCG) are the profits made from selling the fund units after one year of investment.

The tax rates for STCG and LTCG are different. STCGs are taxed at a flat rate of 15%, irrespective of the amount of gain or the income tax slab of the investor. Additionally, the investor has to pay a surcharge (if applicable) and a cess of 4% on the tax amount. LTCG are taxed at a rate of 10%, but only on the gains that exceed Rs. 1 lakh in a financial year. The gains up to Rs. 1 lakh are exempt from tax. The surcharge and cess are also applicable to the LTCG tax amount.

Here is an example to illustrate the taxation of flexi cap funds. Suppose an investor invests Rs. 10 lakh in a flexi cap fund on April 1, 2023, and sells the units on March 31, 2024, for Rs. 12 lakh. The holding period is less than one year, so the gain of Rs. 2 lakh is STCG. The tax on STCG is 15% of Rs. 2 lakh, which is Rs. 30,000. Assuming the investor does not have to pay any surcharge, the cess is 4% of Rs. 30,000, which is Rs. 1,200. The total tax liability is Rs. 31,200.

Now suppose the investor sells the units on April 1, 2024, for Rs. 13 lakh. The holding period is more than one year, so the gain of Rs. 3 lakh is LTCG. The tax on LTCG is 10% of Rs. 2 lakh, which is Rs. 20,000. The first Rs. 1 lakh of gain is exempt from tax. The cess is 4% of Rs. 20,000, which is Rs. 800. The total tax liability is Rs. 20,800.

Conclusion

Whether you are a seasoned investor or new to the stock market, flexi-cap funds can be a great addition to your investment portfolio. They can offer you adaptability, diversified exposure, and potential for growth, which can help you achieve your financial goals. Of course, you should always do your homework and research before investing in any fund. You should also consider your financial goals and risk tolerance and choose the fund that suits your needs and preferences. Investing in flexi-cap funds can be a rewarding experience, but it also involves some risks, as they are exposed to fluctuations in stock prices. Therefore, you should be prepared for some volatility and uncertainty in the market.