All you wanted to know about Flexicap Funds

Since flexicap funds are required to take a position a minimal of 65% of their capital in fairness, they fall underneath the class of Fairness-Oriented Schemes underneath the Revenue Tax Act for tax functions.

We’ve been listening to so much about Flexicap Funds of late. On this article I intend to debate the assorted features of the flexicap fund class and why it is sensible so that you can spend money on a flexicap fund.

Historic Background

Taking a look at the truth that a majority of mutual fund schemes weren’t true to their label and would make investments predominantly exterior of the sphere to which these supposedly belonged, SEBI issued a round on the sixth October 2017 and prescribed varied limits for funding of their capital in order to make sure that varied schemes would stay true to their labels. The round additionally outlined the funding universe for broader classes of fairness schemes of enormous cap, midcap and small cap funds. Below this round, for Multicap Funds, SEBI prescribed a restrict of 65% investments of their capital in fairness and fairness merchandise.

In the course of the operation of this round, SEBI noticed that multicap funds predominantly invested in giant cap funds with out labeling themselves as giant cap funds that are required to take a position a minimal of 80% of their capital within the giant cap universe of high 100 firms. With a purpose to take away this bias of multicap funds to take a position predominantly in giant cap firms, SEBI issued one other round on eleventh September 2020 prescribing a minimal of 25% funding of their capital in giant cap, mid cap and small cap firms as per the definition laid down by SEBI in its earlier round.

This round of SEBI created big confusion amongst the mutual fund buyers. It additionally met with resistance from mutual fund homes as a result of this round successfully tied the arms of multicap funds in two methods. Firstly, it raised the minimal funding restrict to 75% from the sooner restrict of 65% in fairness and fairness merchandise. Furthermore, it restricted the maneuverability of those funds to take a position throughout totally different capitalization section as a result of underneath the brand new round they had been required to take a position minimal 25% of their capital within the firms representing every of three broader capitalization segments.

So, SEBI launched a brand new class of flexicap funds on the sixth November 2020 whereas retaining the Multicap fund class. The brand new created class of flexicap funds appeared precisely just like the multicap fund class because it stood earlier than SEBI mandated section particular funding limits for multicap funds i.e. 65% of capital in fairness on total foundation with none segment-wise restrictions. The round additionally allowed the fund homes to transform their current Multicap Fund schemes to the Flexi Cap class.

Why Flexicap Funds

The fairness markets are extremely unstable. There’s total volatility available in the market in addition to volatility within the particular section of capitalization class. In the course of the interval of correction part of the market, requirement to take a position decrease minimal proportion of capital affords alternative to a scheme a buffer because the scheme can convey down its total publicity to minimal required. Classes like giant cap schemes are essentially required to take a position a minimal of 80% of their capital in giant cap funds for all instances. Due this rigidity such schemes can’t convey down their publicity to fairness under 80% and thus defend themselves in opposition to anticipated downturn. In opposition to this flexicap class is required to take a position solely minimal of 65% of their capital within the fairness market and thus is de facto versatile.

Likewise, through the volatility throughout the assorted segments when the precise section of the market is predicted to do comparatively higher or worse than different segments, freedom to take a position throughout varied class is a blessing for flexicap class in opposition to midcap and small cap class the place they’re required to take a position a minimal of 65% of their capital within the firms falling of their respective class.

Generally when the big cap class is predicted to do higher than different segments, midcap and small cap schemes can’t carry out comparatively as a result of their arms are tied with the requirement to take a position a minimal of 65% within the firms of their very own class. Likewise, when the small cap or midcap class is predicted to do higher, the big cap schemes can’t reap the good thing about such potential as they will solely make investments a most of 20% in midcap and small cap firms.

Flexicap schemes as a class allow you to eat the cake and have it too. That is an evergreen class and has the power that will help you reap the profit at all times whether or not the big cap class is predicted to do higher or mid and small cap class have potentials. Furthermore, as a consequence of decrease requirement of 65% the flexicap class has sufficient legroom to spend money on the international market and thus present world diversification. ICICI Prudential, which didn’t have any scheme on this class, are becoming a member of the membership. Their New Fund Provide for his or her flexi cap fund is open between twenty eighth July, 2021 and twelfth August, 2021.

Taxation of Flexicap funds

Since flexicap funds are required to take a position a minimal of 65% of their capital in fairness, they fall underneath the class of Fairness-Oriented Schemes underneath the Revenue Tax Act for tax functions. Any revenue made on funding in flexi cap, inside 12 months, is taxed at a flat charge of 15% regardless of your slab charge. In case you keep your investments in flexicap schemes for greater than 12 months, your funding qualifies as long run and will get taxed at a flat charge of 10% after the preliminary exemption of Rs 1 lakh. The preliminary exemption of Rs 1 lakh is relevant in respect of all long-term capital positive aspects earned throughout a yr on listed shares and equity-oriented schemes taken collectively on which Safety Transaction Tax has been paid.

(The author is a tax and funding skilled, and could be reached at jainbalwant@gmail.com)