Largecap or Flexicap funds: One of the two or both?

When it comes to picking mutual funds - the task is both easy and challenging. If you understand mutual funds as a product, you can select the right fund for investment. If you don't, you will struggle to find one. Or you may pick any random fund and invest - it would be like going on a trip without planning.

One of the best things about mutual funds is that you get to invest in different asset classes. Today, we will discuss the two popular categories and help you understand which one to pick or if you should have both in your portfolio. Let us get started with large-cap and flexicap funds.

What are large-cap funds?

Large-cap funds invest primarily in stocks of large-cap companies with well-established businesses and a significant market capitalization. Below are some characteristics of large-cap funds:

Large-cap companies generally have a stable track record and an established market presence. They are often considered more reliable.
Given that the companies are reliable, the stock price does not change significantly in a short period (less volatility). Therefore, these funds tend to provide relatively stable returns over the mid to long term.
They may be less volatile than mid-cap or small-cap funds during market downturns.
Large-cap funds may be suitable for investors with a lower risk appetite and a longer investment horizon.

What are flexicap funds?

These are also known as multi-cap funds. They have the flexibility to invest across companies of different market capitalizations, including large-cap, mid-cap, and small-cap stocks. As per SEBI guidelines, a flexicap fund must have a minimum of 65% investment in equity and equity-related instruments.

Below are a few characteristics of it:

The fund manager has the flexibility to change the allocation in different categories based on market conditions, valuations, and growth prospects.
Flexicap funds aim to capture opportunities across the entire market spectrum, potentially benefiting from both large-cap stability and mid and small-cap growth potential.
These funds can be suitable for investors who want exposure to various market segments, are willing to accept a moderate level of risk and seek potential capital appreciation.

Which one should you have in your portfolio?

Deciding whether to invest in large-cap, flexicap funds, or both funds depends on your investment preferences and diversification strategy. Here are a few points to consider before deciding:

Diversification: Investing in both large-cap and flexicap funds can provide diversification benefits. Large-cap funds may provide stability, while flexicap funds can offer exposure to different market segments and potentially higher growth opportunities. You can decide to choose both, but then you need to see if there is not too much overlap among the large-cap companies. The flexicap fund should not be a replica of the large-cap fund in large-cap space (there will always be some overlapping).
Risk Tolerance: If you don't know your risk profile, the first thing you should do after reading this post is to find yours. There are online tools available to give you an idea. Alternatively, you can seek professional help to determine your risk tolerance. Large-cap funds may be more suitable if you have a lower risk tolerance and stability is your priority. Flexicap funds carry a moderate level of risk due to exposure to mid-cap and small-cap stocks, which can be more volatile.
Investment Horizon: Your investment horizon plays a crucial role in deciding which fund to select. For equity-related funds, you should have a minimum of a three-year horizon. Both large-cap and flexicap funds can be considered for investment only if you have a long investment horizon. However, if you have a short to medium investment horizon, large-cap funds may be preferable due to their stability.
Investment Strategy: Consider your investment goals and strategy. If you prefer a hands-on approach and want to rely on the fund manager's expertise in selecting stocks across market capitalizations, flexicap funds can be a good choice. If you prefer a more passive approach, large-cap funds may align better.

Tax implication of large and flexicap funds

Both the funds are equity-oriented. Therefore, they have a similar tax structure. You don't have to factor taxes into your decision-making process. If your holding period is less than a year, the gains fall under short-term gains, and you are liable to pay a tax of 15%. If your holding period is equal to or more than a year, the gains are termed long-term gains. For it, you will be taxed at 10% with an exemption of up to Rs 1 lakh.

Conclusion

Ultimately, it is essential to evaluate your risk tolerance, investment goals, and time horizon to determine which type of fund or combination of funds aligns with your investment preferences.

Large caps are perhaps the safest investment option in the equity category. For diversification and higher returns, you can look at the flexicap fund.

Whatever option you choose, the best way to invest in mutual funds is via a systematic investment plan (SIP). It would be the best option since it would mitigate the risk as you invest in intervals. As a bonus, you would also be averaging out your cost.