These flexicap funds rallied over 50% in the last one year

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A new equity fund category — flexicap funds — was launched in November last year after SEBI changed the definition of multicap funds. With the new rules kicking in from February 1, fund houses can choose to re-categorise erstwhile multicap schemes as flexicap schemes if they wanted to continue with the earlier style. Many fund houses switched their multicap schemes to flexicap schemes and as a result, the flexicap category now has 25 schemes. Getting confused between flexicap and multicap funds? Let us solve the confusion.

Flexicap funds

Flexicap funds need to have a minimum of 65% of their assets in equity and equity-related investments. There is no cap on how much these funds can or need to invest in large, mid or smallcaps.

So, basically the earlier definition of multicap funds is now mandated to flexicap funds.

Still unclear? Here is the difference between multicap and flexicap funds.

Multicap funds now must invest a minimum of 25% each in large, medium, and small caps. This took away the flexibility of these funds. On the other hand, flexicap funds have the leeway to dynamically invest in small, mid and largecap stocks without any restriction on the level of exposure towards these three segments.

Understanding the risks

Since the schemes invest in midcap and smallcap stocks they tend to be riskier than largecaps. The fund manager of a flexi fund can increase his exposure to mid and small-scale enterprises in a robust economic environment to benefit from earnings. He can also choose to transfer investor money from mid-cap companies’ stocks to large-cap companies to take cover if he expects extended downtime.

Tax implications

When you redeem the units of a flexicap fund, you earn taxable capital gains. The rate at which you will be taxed depends on the period for which you stayed invested in the scheme – the holding period. The tax rates are as follows:

Short Term Capital Gain (STCG) – A holding period of up to one year. STCG is taxed at 15%.

Long Term Capital Gain (LTCG) – A holding period of more than one year. There is no taxon LTCG of up to Rs. 1 lakh. Above this amount, LTCG is taxed at the rate of 10% without the benefit of indexation.

(Disclaimer: The above list is for informational purpose only. Before investing, please consult your financial adviser)