Mutual funds have been steadily emerging as preferred investment options for retail investors and have become one of the attractive avenues to invest money. Such preferences arise from the convenience of investing in mutual funds and a wide range of mutual fund schemes investors may choose from. Such mutual fund schemes may invest in different asset classes, but also across spectrum of investments within the same asset class. When it comes to investing in equity, investing across market capitalization segments is often advisable, for it helps diversification of the investment portfolio. The list of the companies sorted based on the average market capitalization is published by the Association of Mutual Funds in India (AMFI) every half year. While large-cap companies are the top 100 companies in that list, the companies listed from 101 to 250 are classified as mid-cap companies. The companies ranking 251 and beyond are called small-cap companies.
While there are some equity fund categories investing only in large cap or mid cap or small cap segment, multi cap funds and flexi cap funds are two specific categories under equity funds which aim to invest across different market capitalization segments.
What are Multi Cap Funds?
As per the SEBI Guidelines on categorizing mutual fund schemes, a multi-cap fund can invest across large-cap, mid-cap and small-cap companies, but with minimum investment of 25% in each of these market cap segments. With minimum investment criterion, such funds guarantee the diversified exposure to market cap segments to the investors. While the minimum investment criterion is mandated up to 75% (25% each in three market cap segments), the fund managers enjoy the flexibility to invest the remaining 25% in any of such segments. As such, exposure to any market cap segment cannot exceed 50%. Such funds aim to balance stability and growth through different market cap segments. While the investment exposure to large-cap segment aims for reasonable stability and insulation from market volatility, exposure to mid-cap and small-cap segment offers relatively higher potential of capital appreciation.
As on April 30, 2022, multi cap funds have an AUM (Assets Under Management) of Rs. 55.627 crores reflecting market share of 4% amongst all the open-ended equity funds (Source: Association of Mutual Funds in India – AMFI).
What are Flexi Cap Funds?
SEBI had introduced category of flexi cap funds in November 2020 which aimed at providing flexibility to the fund managers to invest across market cap segments, but without any specified minimum investment exposure to any of the market cap segments. As per the SEBI Guidelines, flexi cap funds must invest minimum 65% of its assets in equity and equity related instruments. Such investment can be made across large-cap, mid-cap and small-cap companies.
Owing to their inherent benefits and flexibility for investment exposure across market cap segments, such funds are second amongst all equity fund categories. Flexi cap funds have an AUM (Assets Under Management) of Rs. 2,23,532 crores, which is the highest amongst all equity fund categories. As such, these funds enjoy the market share of 16% amongst all the open-ended equity funds as of April 30, 2022 (Source: Association of Mutual Funds in India – AMFI).
Taxation of Multicap Funds and Flexi Cap Funds
As per the Income Tax laws, an equity-oriented fund must invest at least 65% of its assets in equity securities and equity-related securities. Since both multi cap funds and flexi cap funds invest at least 65% of their assets in equities, such funds are classified as equity-oriented funds under tax laws.
The tax rates and cut-off holding period for classifying gains as Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) for equity funds is 12 months. Gains from investments with shorter holding periods are classified as STCG, and gains with more extended investment periods are classified as LTCG. As such, the tax rate for STCG from these funds is 15% (plus applicable cess and surcharge), while the tax rate for LTCG is 10% (plus applicable cess and surcharge) without indexation benefit. Additionally, LTCG from equity shares and equity funds of Rs. 1 lakh in aggregate every year are taxed at a zero rate.
Differences between Multi Cap Fund and Flexi Cap Fund
Here are salient differences between multi cap fund and flexi cap funds as below:
|
Particulars |
Multi Cap Funds |
Flexi Cap Funds |
|
Minimum investment in equities and equity related instruments |
75% of total assets |
65% of total assets |
|
Minimum exposure in any one market cap segment |
25% |
0% |
|
Maximum exposure in any one market cap segment |
50% |
100% |
|
Risk profile |
Relatively higher, since investment portfolio exposed to all market cap segments |
Risk profile can be aligned with suitable asset allocation pattern |
The decision to invest across these two fund categories upon the market perception and relative risk appetite of the investors. If an investor is aiming to hold a diversified investment portfolio across different market cap segments at all times, multi cap is suitable with minimum 25% investment in each segment. However, the investors seeking dynamic allocation to different market cap segments can invest in flexi cap funds.
Note: The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the investment date.
