What are Flexi Cap Funds?

Flexi Cap Funds are open-ended equity mutual funds that invest in any of the market cap segments, such as large-cap, mid-cap, or small-cap companies. It offers flexibility to the fund managers to invest in stocks of any of these companies across different sectors and market caps. This allows investors to have a diverse portfolio, thus balancing the risk and return aspects.

Let’s understand this with an example,

Suppose a fund manager allocates the invested amount in a particular market sector. After a certain period, it is observed that there is a dip in the performance due to market conditions. In such a scenario, the fund manager can change the fund allocation to some other sector which is performing well. In this manner, investors can benefit from best-performing stocks but also, at the same time, mitigate the risk by exiting from the low-performing stocks.

Read along to understand the basics of flexi cap funds, their features, tax benefits, and why you should consider investing in them.

List of Flexi Cap Funds

Here are some of the top performing Flexi Cap Funds based on their 3-year annualised returns -

• HDFC Focused 30 Fund Direct Plan Growth
• JM Flexicap Fund Direct Plan Growth 
• HDFC Flexi Cap Direct Plan Growth
• Motilal Oswal Flexi Cap Fund Direct Growth
• Invesco India Focused Fund Direct Growth
• ICICI Prudential Focused Equity Fund Direct Growth
• Mahindra Manulife Focused Fund Direct Growth
• ICICI Prudential Retirement Fund Pure Equity Plan Direct Growth
• HDFC Retirement Savings Fund Equity Plan Direct Growth
• ICICI Prudential India Equity FOF Direct Growth

Introduction to Flexi Cap Funds

When it comes to investing in mutual funds, choosing between large-cap, mid-cap, and small-cap companies can be a difficult decision. Mostly, when the market is volatile, and we want to mitigate our risks, we tend to invest in the best-performing sectors. Now, just imagine having a mutual fund that allows investors to invest in any of these companies - large, medium, or small, depending on where the best growth is. Here is what flexi-cap mutual funds have to offer. It is an equity fund that doesn't restrict investors to specific market cap segments, giving them the flexibility to adjust their portfolios based on the market conditions.

Due to its diversified equity exposure, flexi cap funds have been gaining a lot of popularity among investors. Let us have a look at some of the key features of flexi-cap funds.

Features of Flexi Cap Funds

Some important features of flexi cap funds are -

• Diversification: These funds allow investing across all market cap segments, thus reducing the risk associated with investing in only one specific segment.
• Flexibility: It gives flexibility to the fund managers to allocate the funds to different sectors and market capitalization based on the changing market conditions. 
• Growth Potential: Since the flexi cap funds allow investing in mid-cap as well as large-cap companies, it can potentially generate higher returns from best-performing stocks but also, at the same time, mitigate the risk by exiting from the low-performing stocks.
• As per the Securities and Exchange Board of India (SEBI), Flexicap Funds can invest in securities of any market capitalization and is mandated to invest at least 65% of its assets in equities or equity-based investments.

Advantages of Investing in Flexi Cap Funds

Flexi-cap funds provide an attractive combination of growth opportunities and risk reduction, making them a favorite among many investors. The following are some of the major benefits of investing in flexi-cap funds:

• Exposure to all sizes and types of companies, ranging from large-cap to mid-cap and small-cap companies. This helps in balancing risks and returns by reducing dependency in any one particular market segment.
• Fund managers are free to make changes in their portfolio positioning depending on the current market condition. Such flexibility enables them to cut losses by shifting the funds to the better performing market cap.
• Flexi-cap funds have the potential to earn higher returns by investing in small-cap and mid-cap companies.
• The flexibility and diversification of flexi cap funds make them ideal for long-term financial planning, such as retirement, children's education, marriage, or wealth creation in the long run.
• Rather than managing multiple funds spread over market caps, investors can diversify their portfolio with a single flexi-cap fund. This makes it easy to manage a portfolio and avoids regular monitoring.

Risks and Considerations for Flexi Cap Funds

Even though flexi cap funds provide many benefits, it's essential to know about the risks involved:

• Market Volatility: Flexi cap funds are open-ended equity funds. Meaning, they are more exposed to market volatility. The fund performance can drop substantially in the event of a bearish market.
• Role of Fund Manager: The fund performance largely relies on the fund manager's investment strategy.
• Risk Associated with Mid and Small-Cap Stocks: Although mid-cap and small-cap stocks provide greater growth possibilities, they have greater risks involved. They are more volatile and less liquid in comparison to large-cap stocks.
• Expense Ratio: The expense ratio of the fund, which is the annual fee charged to manage the fund, can impact your returns. It's essential to consider the expense ratio when choosing a flexi-cap fund.
• Economic Conditions and Sector Risks: Changes in economic conditions or specific sectors can also impact the fund's performance.
• Investment Horizon: Flexi-cap funds are mostly suited for investors with a long-term investment horizon ( 5-7 years) to withstand the market's volatility and earn substantial returns.

Who Should Invest in Flexi Cap Funds?

Flexi-cap funds can be a great investment option for someone looking for diversified equity exposure across different market capitalizations

. Here’s who could consider investing in flexi-cap mutual funds:

• Moderate to high-risk investors who have a long-term vision and are ready to handle market volatility.
• Investors looking to diversify their portfolio for growth potential and not just restricted to specific market cap segments.
• Investors looking for long-term goals like retirement, children’s education, marriage, etc., and have a time horizon of at least 5-7 years.

Tax Implications on Flexi Cap Funds

It is important to understand the tax implications of flexi cap funds in order to maximize your return on investment. Here's a brief breakdown:

• Short-Term Capital Gains (STCG): If you sell your units within one year from the date of purchase, the gains are considered short-term and are taxed at a flat rate of 15%.
• Long-Term Capital Gains (LTCG): If you sell your units after holding them for more than one year, the gains are regarded as long-term. LTCG of up to ₹1 lakh in a financial year is tax-free. Long-term gains in excess of ₹1 lakh are taxed at 10% (without indexation benefit).

Taxation on Dividends: Dividends earned on flexi cap funds are considered a part of your taxable income and are taxed as per your income tax slab.

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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