Flexi cap vs large cap: Which is better for the long term?

For a long-term investment of 10 years+, which is better: large cap/bluechip or flexi cap fund? - Sashank

If you wish to build wealth, equity-oriented mutual funds should make up a sizable portion of your portfolio. There are various subcategories of equity-oriented mutual funds. Two big such subcategories from the equity category are large-cap funds and flexi-cap funds. Here, we'll compare the two and talk about which one is most appropriate for investors with a long time horizon.

Difference between large-cap and flexi-cap funds
A large-cap fund invests only in companies that have a large market capitalisation. Small investors who can't afford to buy huge stocks get the opportunity to invest in them by investing in a single large-cap fund.
Whereas a flexi-cap fund invests in different market capitalisation stocks as well as different sector or industry stocks. Unlike large-cap funds, flexi-caps do not concentrate their investment on one particular market cap. They rather diversify their investment across various companies that belong to different market caps and sectors.

What about the tax implications?
Since both are equity-oriented mutual funds, both categories have a similar tax structure. If the holding period is less than a year, the gains are termed as short-term gains and the investor is liable to pay a tax of 15 per cent. If your holding period is equal to or more than a year, the gains are termed as long-term gains and the investor is taxed at 10 per cent with an exemption of up to Rs 1 lakh.

Comparing the SIP returns
To find out how both these funds have performed in the past, we took the average returns of both categories. Let's say you invested Rs 10,000 in each of the two fund categories every month starting in 2013. In such a case, you would have invested around Rs 11.60 lakh in each category. By June 2022, you would end up with Rs 24.63 lakh in a flexi-cap fund and Rs 22.78 in a large-cap fund. The difference between them is about Rs 1.84 lakh; which is a healthy amount.

Which is suitable for whom?
Since both large-cap and flexi-cap funds invest purely in equity, there will be volatility, hence these are suitable for investors who understand the market fluctuations and the functioning of the stock market. Investors must go for these funds if they have a long-term investment horizon and understand the risks associated with it.

Large-cap funds are suitable for investors who are looking to concentrate only on large capitalised companies. Small investors who cannot invest in the large sector individually due to a lack of knowledge or money can invest in these funds. Large-cap funds may seem sufficient to most investors but the constraint will soon affect the returns. Flexi-cap funds on the other hand have the freedom to invest across market capitalisations, which is an advantage but comes with a bit of risk.

Flexi-cap funds vs large-cap funds: Which is better and why?
Flexi-cap funds.

This is because they allow the fund managers to invest across the market cap. Fund managers can opportunistically shift the allocations between large, mid, and small caps. These funds also provide slightly better returns because of this.

However, the manager is handicapped in the large-cap fund, as they can only invest in stocks that have a large capitalisation. Flexi-caps are better from a diversification standpoint.

Things to keep in mind

• Ideally, investors should invest in these funds for over five years to maximise returns.
• It is advisable to choose the fund based on the investment goals, risk tolerance levels and investment horizons.
• Investment decisions should be made after doing thorough research, It is wise to pick a fund that best suits investors' needs and expectations.
• Lastly, since these are equity funds, they are expected to be volatile. A systematic investment plan (SIP) would be wise since it would mitigate the risk by investing in intervals. As a bonus, investors would also be averaging out their cost.

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