What are Flexi-cap Mutual Funds? – Understanding its Key Benefits

In the year 2020, SEBI introduced a new category of mutual funds in the equity segment, which is the Flexi-cap fund. Often new investors confuse these funds with mid-cap funds as both of these fund categories invest across different companies irrespective of the market capitalisation, but both have different asset allocation criteria. The article below will discuss Flexi-cap mutual funds like Paraag Parikh flexi cap fund in detail and the benefits of understanding flexi-cap funds. 

What are flexi-cap funds? 

Flexi-cap funds are equity mutual funds that need to invest at least 65% of its asset into equity and equity-related assets of companies irrespective of the market capitalisation. So, it can invest the entire AUM into the large-cap or small-cap, mid-cap, or in any proportion that the fund manager thinks is right for the performance of the fund. 

As the name suggests, flexi-cap has the flexibility to invest the asset under management as per the market condition. So, for instance, if the market is in a bull phase, then the fund manager can invest most of the fund’s assets into mid-cap and small-cap companies as they can offer higher returns during a bull phase of the market. While during a bear market, the fund manager can reallocate the assets under the management of the fund like the Parag Parikh flexi cap fund, where he mostly invests the AUM into large-cap companies, as during a volatile market, large-cap companies offer better stability of returns and lesser risk compared to small or mid-cap companies. 

This is the difference between a flexi-cap and a multi-cap mutual fund. Multi-cap mutual funds have to invest at least 25% of their AUM in companies across market capitalisation. So, 25% in large-cap, 25% in small, and another 25% in mid-cap. With flexi-cap, the asset allocation changes as per the market scenario to make the most of the market condition or to reduce the risk. 

What are the key benefits of flexi-cap funds?

Two key factors make flexi-cap so sought after – 

  • Firstly, the flexibility that it offers in terms of asset allocation is unmatchable when it comes to equity mutual funds. Most equity mutual funds have set criteria to invest in particular companies as per market capitalisation, which cannot be altered as per the market condition. The dynamic asset allocation factor helps the investors earn a higher return than most of the other equity fund categories without taking too much risk. 
  • These funds offer great diversification for your portfolio. While all mutual funds offer diversification to the investment portfolio, with flexi-cap funds, diversification of the portfolio comes hand-in-hand as it can invest as per the market scenario, so the risks are adjusted in a better way, and potential return increases. 

Is Parag Parikh flexi cap fund good for investment?

Parag Parikh Mutual Fund offers one of the top-performing flexi-cap funds that is Parag Parikh flexi cap fund. This fund has outperformed in the category since its launch of the fund. While the average 5-year return of flexi-cap funds is around 12.76%, this fund has offered 18.36% per annum. Even the 3-year returns are higher than the category average, and the same goes for the return since inception. 

The fund has Rs. 24594.84 crores of assets under management, and it changes an expense ratio of 0.77%. 

The fund has no lock-in period. You can redeem it at any point in time. However, if you redeem it within one year, then a 15% short-term capital gain tax will be applicable, excluding cess and surcharge. If you redeem it after one year, then you only have to pay 10% long-term capital gain taxes on profits above Rs. 1 lakh. 

Who should invest in flexi-cap funds?

Flexi-cap mutual funds like the one offered by Parag Parikh Mutual Fund are ideal for investors who can stay invested for at least five years or more and have a moderate risk appetite, and looking for a higher return. The five-year horizon is for better performance of the fund. Though anyone can redeem at any time, if you can stay invested for five years or more, you can reap higher returns. 

Final thoughts

The flexibility in the asset allocation rule for flexi-cap makes all the difference. These funds can help investors earn a higher return for a bull market while mitigating risk in a bear market by dynamic asset allocation.